Small business HRA services

Freedom Benefits offers three levels of service for self-directed small business Health Reimbursement Arrangements:

BASIC: 

Design of an HRA plan through an in-person interview

Recommended sample documents for limited use

ADVISORY:

Answers to benefits questions throughout the plan year

CLAIMS ADMINISTRATION:

Claims administration and preparation of summary report to the payroll administrator

 

Health Reimbursement Arrangement (HRA) For Small Business – Sample Document

Freedom Benefits maintains a collection of sample documents for a wide range of small business employee benefit plans. While other content is published and available in its entirety here on this web site, sample documents are available only through personal request to this site’s author Tony Novak.

The sample documents should be reviewed by an attorney before recommendation or use in any application. While we are aware that some small businesses use our sample documents as templates, we can not endorse that approach.

Following is a sample outline for a Health Reimbursement Arrangement (HRA) plan specifically designed for a small business where the employer pays the entire amount of the contribution. This design would not be used in the more common situation when the employee pays part of the health cost and the goal is to avoid paying wage taxes on health plan contributions.

Table of Contents

ARTICLE I. PURPOSE AND ESTABLISHMENT
1.1 Purpose
1.2 Name
1.3 Plan Not Subject to Cafeteria Plan
1.4 Effective Date
1.5 Termination Date
ARTICLE II. DEFINITIONS
2.1 Board of Directors
2.2 Cafeteria Plan
2.3 Code
2.4 Committee
2.5 Employer
2.6 Compensation
2.7 Dependent
2.8 Employee
2.9 Participant
2.10 Plan
2.11 Plan Adviser
2.12 Plan Year
2.13 Qualifying Medical and Health Care Expenses
2.14 Reimbursement Account
2.15 Termination
ARTICLE III. ELIGIBILITY, ENROLLMENT AND TERMINATION
3.1 Eligibility
3.2 Enrollment
3.2 Acceptance of Elections
3.3 Termination
ARTICLE IV. REVOCATION AND MODIFICATION OF ELECTED COVERAGE
4.1 Revocation and Modification
4.2 Administrative Modification
4.3 Limitations on Elections of Highly Compensated Employees
ARTICLE V. BENEFITS
5.1 Generally
5.2 Carry-Forward
5.3 Forfeiture
5.4 Benefits Not Limited to Expenses Incurred During Plan Year
5.5 Qualifying Health and Medical Care Expenses
5.6 Refund of Duplicate Reimbursement
ARTICLE VI. ADMINISTRATION
6.1 Committee
6.2 Duties and Powers of the Committee
6.3 Delegation and Allocation of Responsibilities of the Committee
ARTICLE VII. CLAIMS PROCEDURE
7.1 Submission of Claims
7.2 Review of Denial of Claims
ARTICLE VIII. FUNDING
8.1 No Obligation to Fund
8.2 No Interest
ARTICLE IX. AMENDMENTS; TERMINATION
ARTICLE X. MISCELLANEOUS
10.1 No Employment Contract
10.2 No Assignment
10.3 Choice of Law
10.4 Severability
10.5 Gender, Singular and Plural References
ARTICLE XI. ADOPTION BY MULTIPLE EMPLOYERS
11.1 Method of Adoption
11.2 Delegation Upon Adoption
11.3 Employer Contributions
11.4 Withdrawal or Removal
Appendix A – Schedule of Benefits

In addition to the plan document, a sample corporate resolution to adapt the HRA (for the employer’s records) and sample Summary Plan Description (for electronic distribution to employees) are also provided. Sample plan documents are available free of charge to the attorney of Freedom Benefits’ business clients. Plan documents are typically modified to suit your specific business intent.

Other HRA resources at www.tonynovak.com:
25 reasons that small businesses choose health reimbursement arrangements
HRA plan design approved by IRS
HRA plan helps owner/employees
HRA plan overview
HRA plans for small businesses
HRA vs. HSA: Which is best for me?
IRS approves new HRA plan design
MSAs, HRAs and HSAs: which health plan is right for my small business

(If the links are broken due to an anticipated site update then do a search for a term or phrase).

Carry-forward benefits in a Health Reimbursement Arrangement (HRA)

The most common use of a small business Health Reimbursement Arrangement (HRA) is to cover employee medical expenses that fall beneath the coverage limits of a high deductible insurance policy. Deductibles are usually set on an annual calendar year basis. Unless the HRA plan provides otherwise, the benefit expires each year and start again the following year with a new policy deductible. This is generally the preferable way to run a small business Health Reimbursement Arrangement.

Small businesses, however, often wish to allow their Health Reimbursement Arrangement (HRA) to carry forward unused benefits into future years. The logic may be that this rewards healthy employees, or alternately, may be based on the mistaken belief that HRA works like its cousin the Health Savings Account (HSA). For this reason, extra discussion is useful on the reasons that a business may wish to provide carry-forward benefits in a HRA.

While carry-forward of benefits in a HRA is possible, the details and concepts may be different than the business owner and employees imagine.

This article is an annotated excerpt of a regulation on the topic of Health Reimbursement Arrangements that expands upon Rev. Rul. 2002–41 related to allowable HRA carry-forward plan features and designs. Our comments added are in bold italics. All of the layout and formatting are for emphasis and readability for discussion purposes.

Section 105.—Amounts Received Under Accident and Health Plans (Also §§ 106, 125.) Health Reimbursement Arrangements (HRAs).

This ruling describes an employer-provided medical care expense reimbursement plan called a health reimbursement arrangement (HRA), in which reimbursements for medical care expenses made from the plan are excludable from employee gross income. Among other things, the HRA described retains favorable tax treatment because it only reimburses employees or former employees for medical care expenses of the employee or former employee and their spouses and dependents; is solely employer-funded and not paid for directly or indirectly from salary reduction; and although it allows participants to carry forward unused amounts for use in later coverage periods, these amounts may never be used for anything but reimbursements for qualified medical expenses.

ISSUE

Whether employer-provided coverage and medical care expense reimbursements made under a reimbursement arrangement that allows unused amounts to be carried forward (info future years of employment and even into retirement), as described in Situations 1 and 2 below, are excludable from gross income under §§ 106 and 105 of the Internal Revenue Code, respectively.

FACTS

Situation 1: An employer sponsors a major medical plan for all employees that provides coverage under a policy of accident and health insurance for certain medical care expenses described in § 213(d)(1)(A) and (B). The major medical plan has a $2,000 annual deductible for employee-only coverage and a $4,000 annual deductible for family coverage. However, certain preventive care benefits (e.g., annual physicals and well-baby visits) are covered without regard to the plan’s deductible. The major medical plan is paid for in part pursuant to salary reduction elections under the employer’s cafeteria plan. The election form provides that salary reduction elections are used only to pay for the major medical plan. To participate in the major medical plan, an employee must make a $1,000 annual salary reduction election for employee-only coverage or a $3,500 annual salary reduction election for family coverage. Notice that the features of the “major medical plan” are discussed separately from those of the insurance policy because the two are legally distinct. Most small employers consider them to one and the same.

The employee contributions are only for the insurance.

Participation in the employer’s insurance is required as a condition for the HRA.

The insurance is a “typical” high deductible insurance policy most commonly used within HSA-qualified plans.

There is no mention of separate accounting of employer funds for future benefits, separate employee accounts or segregation of employer funds for the amounts of possible benefit claims allocated to future years. These are all employer bookkeeping issues – not tax issues.

In addition to the major medical plan, the employer also sponsors a health reimbursement arrangement (HRA) that reimburses the medical care expenses of all participating employees and their spouses and dependents up to an annual maximum reimbursement amount that is fixed on January 1 of each year. The HRA is available only to employees who participate in the major medical plan. The HRA meets the nondiscrimination requirements of § 105(h). The HRA is paid for by the employer and employees do not make any salary reduction election to pay for the HRA. The HRA operates on a calendar year basis. Employees have no right to receive cash or any benefit other than reimbursement for medical care expenses under the HRA. The expenses reimbursable under the HRA are any medical care expenses that would be covered by the major medical plan but for the major medical plan’s deductible, (as a practical matter this makes claim administration easy for a small business since the insurance will effectively handle the insurance claim first and the amount listed as “applied to deductible” becomes the claim for the HRA plan) limitation to expenses that are “usual, customary and reasonable,” or any other similar dollar limitation imposed by the major medical plan. Only expenses that are substantiated are reimbursed. This section describes the “normal” features of an HRA; the example used is a very typical plan design.

The maximum reimbursement amount for the first year in which an employee participates in the HRA is $1,000 for an employee who has employee-only coverage under the major medical plan and $2,000 for an employee who has family coverage under the major medical plan. Unused reimbursement amounts from one year are carried forward for use in later years. Therefore, in each year after the first year, the maximum reimbursement amount under the HRA equals $1,000 for an employee who has employee-only coverage under the major medical plan and $2,000 for an employee who has family coverage under the major medical plan, increased by the unused amount from the previous year. If an employee retires or otherwise terminates employment, any unused reimbursement amount remaining in the HRA is unavailable thereafter. Under the terms of the plans, a qualified beneficiary who chooses to elect COBRA continuation coverage may only elect the HRA in conjunction with the major medical plan. However, a qualified beneficiary may choose to elect COBRA continuation coverage for only the major medical plan. The COBRA applicable premium for continuation of the major medical plan is $1,800 for employee-only coverage and $4,500 for family coverage. This section describes the more creative HRA plan design features under discussion.

Situation 2: The facts are the same as Situation 1, except that any portion of the maximum reimbursement amount under the HRA that is not applied to reimburse medical care expenses before an employee retires or otherwise terminates employment continues to be available after retirement or termination for any medical care expense under § 213(d)(1) (A), (B), and (D) incurred by the former employee or the former employee’s spouse and dependents. However, after the employee retires or otherwise terminates employment, the maximum reimbursement amount is not increased unless COBRA continuation coverage is elected. This second example describes a post-retirement benefit – not so common in small business HRA plans.

LAW AND ANALYSIS

Note that this discussion omits employer deductibility issues – a common area of concern for small business HRA plans. In short, employer contributions to an HRA are deductible when benefits are paid, not when benefits are allocated. An HRA plan that allows for carry-over means that the employer has financial liability for benefits promised in the future but not a tax deductible expense until the future year.

Section 61(a)(1) and § 1.61–21(a)(3) of the Income Tax Regulations provide that, except as otherwise provided in subtitle A, gross income includes compensation for services, including fees, commissions, fringe benefits, and similar items.

Section 106 provides that “gross income of an employee does not include employer-provided coverage under an accident or health plan.”

Section 1.106–1 provides that the gross income of an employee does not include contributions which the employee’s employer makes to an accident or health plan for compensation (through insurance or otherwise) to the employee for personal injuries or sickness incurred by the employee or the employee’s spouse or dependents (as defined in § 152).

Section 105(a) provides that, except as otherwise provided in § 105, “amounts received by an employee through accident or health insurance for personal injuries or sickness shall be included in gross income to the extent such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer.”

Section 105(e) states that amounts received under an accident or health plan for employees are treated as amounts received through accident or health insurance for purposes of § 105 (and § 104 relating to compensation for injuries and sickness).

Section 1.105–5(a) provides that an accident or health plan is an arrangement for the payment of amounts to employees in the event of personal injuries or sickness. Section 105(b) states that except in the case of amounts attributable to (and not in excess of) deductions allowed under § 213 (relating to medical expenses) for any prior taxable year, gross income does not include amounts referred to in subsection (a) if such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by the taxpayer for the medical care (as defined in § 213(d)) of the taxpayer or the taxpayer’s spouse or dependents (as defined in § 152).

Section 1.105–2 provides that only amounts that are paid specifically to reimburse the taxpayer for expenses incurred by the taxpayer for the prescribed medical care are excludable from gross income. Thus, § 105(b) does not apply to amounts that the taxpayer would be entitled to receive irrespective of whether or not the taxpayer incurs expenses for medical care. This also relates to substantiation of claims for compliance purposes.

Section 105(h)(1) provides that, unless the plan satisfies the nondiscrimination requirements of § 105(h)(2), amounts paid under a self-insured medical expense reimbursement plan to a highly compensated individual will not be excludable from that individual’s gross income under § 105(b) to the extent they constitute excess reimbursements.

Coverage provided under an accident and health plan to former employees and their spouses and dependents are excludable from gross income under § 106. See, Rev. Rul. 82–196, 1982–2 C.B. 53; Rev. Rul. 85–121, 1985–2 C.B. 57. Under the facts described above, the HRA is an employer-provided accident and health plan used exclusively to reimburse expenses incurred for medical care as defined under § 213(d).

Under the HRA, no benefits other than reimbursements for medical care expenses are available either in the form of cash or other non-taxable or taxable benefits at any time. (Employees have no “right” to benefits other than through submission of a substantiated claim).

For purposes of determining whether any part of the salary reduction for the major medical plan is attributable to the HRA, under the facts and circumstances, the applicable premium for COBRA continuation coverage may be used as the actual cost of the major medical plan.

Under the facts described above, the actual cost of the major medical plan for one year is $1,800 for employee-only coverage and $4,500 for family coverage. The amount of salary reduction election for employee-only coverage ($1,000) is less than $1,800 and the amount of salary reduction election for family coverage ($3,500) is less than $4,500. Also, the cafeteria plan election form states that salary reduction elections are used only to pay for the major medical plan. Under these facts and circumstances, the HRA reimbursement amounts are not attributable to the salary reduction contributions made to pay for the major medical plan. This is important because employee contributions can not be used for the HRA.

In In Situation 2, the employer provides accident and health coverage under the HRA for former employees. This coverage is provided based on the former employee’s prior employment relationship with the employer. The HRA is used to reimburse the former employee only for medical care expenses of the former employee or the former employee’s spouse or dependents. Neither the former employee nor the former employee’s spouse or dependents receive any other benefits from the HRA at any time.

HOLDING

Employer-provided coverage and medical care expense reimbursements made under the reimbursement arrangement that allows unused amounts to be carried forward, as described in Situations 1 and 2, are excludable from gross income under §§ 106 and 105, respectively. See Notice 2002–45 published elsewhere in this Internal Revenue Bulletin for further information and guidance concerning HRAs. (end of excerpt)

 

The take home tips for small businesses setting up an HRA plan with carry-forward benefits:

1. Use only employer-paid money for the HRA. If employee contributions are required to the health plan, clearly specify this is for insurance only and outside of the HRA.

2. Have the HRA cover only expenses “applies to deductible” under the insurance policy. This makes claim administration easier.

3. Do not rely on this advice as a blanket approval for post-retirement benefits – it only pertains specifically to COBRA participants. Although technically allowed, post-retirement health benefits should probably not be covered under a typical small business HRA.

4. This tax publication does not address the practical accounting aspects, cash flow and asset management considerations of a small business HRA that provides benefits beyond the current year. These should be considered separately.

5.  HRAs are best suited to providing medical benefits in the current year that are not covered by insurance. In most cases there are better alternatives other than a HRA for providing health benefits in future years.

Changes to 2014-2015 tax penalties for small business health plans

On February 18, 2015 the IRS released Notice 2015-17 that delays some of the tax penalties included in the Affordable Care Act related to businesses that pay for or reimburse certain types of employee medical costs under conditions not allowed by the Affordable Care Act. The notice is important to businesses that paid or reimbursed the cost of individual health insurance in 2014 or those who reimbursed employees for out-of-pocket medical expenses outside of an insurance plan over the past year.

Freedom Benefits previously estimated that more than 1 million small businesses were in violation of one of more provisions of the law and the size of potential excise tax penalties (up to $36,500 per employee for 2014 alone) was enough to bankrupt many small firms. Under the IRS guidance issued today the application of penalties for small businesses is delayed until June 30, 2015. It is important for small businesses to review and update their non-compliant health plans over the next four months. Freedom Benefits offers a do-it-yourself compliance checklist or a professional review with sample plan documents that are intended to meet the new requirements.

In summary, the tax penalty for past violations in small business employee health plans is gone. Businesses must bring their health plans into compliance by June 30, 2015 in order to avoid tax penalties for 2015 an beyond.

What is the difference between a “health reimbursement arrangement” and a “health reimbursement account”?

This is a common question that may signal an underlying misconception of the nature of the employee benefit plan under consideration. It makes sense to expand on the distinction between a “health reimbursement arrangement” and a “health reimbursement account” because of the potential to confuse the concepts or the tendency to use the terms interchangeably.

In the past – perhaps ten years ago – it was customary, even among employee benefits professionals, to hear the the terms used interchangeably. More recently employee benefit professionals use only the term “health reimbursement arrangement” and might have considered the term “health reimbursement account” to be just an improper usage or an error. Now the terminology has resurfaced in a new context.

We draw attention to the distinction between the two phrases because of recent surge in popularity of health reimbursement accounts that are part of executive compensation packages not associated in any manner with health reimbursement arrangements.

The former, a Health Reimbursement Arrangement (also known as an HRA) is a tax-qualified employee benefit plan that is not discussed in this Q&A. Please see other pages on this Web site devoted to HRAs. The latter term, a “health reimbursement account” is the subject of the remainder of this Q&A.

A health reimbursement account is a bank account or other accounting entry whose function is to distinguish funds earmarked by an employer for employee health expenses from other general operating expenses of the employer. The separation of funds is an accounting notion only since there is no legal distinction between the health reimbursement account and the employer’s general operating funds.

Funds placed into a health reimbursement account are not tax deductible and are treated in the same manner as funds in any other regular employer-owned account. The funds are subject to attachment by general business creditors, the same as any other general business funds. Interest, if any, is taxable to the employer. If the funds are paid to employees then this amount is taxable compensation (just like wages) unless a specific tax law (like IRC code section 105 or 125) allows them to be paid to employees tax-free. In other words, a health reimbursement account has no tax status or effect.

An employer may wish to eventually use the funds in the health reimbursement account to pay for employee health expenses in a manner that would make the expenses deductible to the business and tax-free to the employee. Any of the qualified health plans discussed elsewhere in this Web page can be used, including the HRA that was mentioned earlier in this article.

In some other cases employers use health reimbursement accounts to fund executive health benefits that are not tax-qualified benefits under any available option. The funds may be earmarked for owners, highly compensated employees or key employees whose health benefits are subject to additional tax restrictions. In this sense, the health reimbursement account serves the same purpose and function as funding a deferred compensation account for executive employees. In these cases it may be appropriate to refer to the health reimbursement account as a non-qualified account, indicating their lack of tax advantages.

Additionally, some employers ask whether it is possible to establish a health reimbursement account for each employee. This is possible and is becoming increasingly popular; but again this serves no legal purpose or function other than to earmark a specific sum of the employer’s funds that are intended for a specific employee’s future health expenses.

Finally, please be aware that “health reimbursement arrangement” is a term recognized in official tax publications and laws and therefore has a specific legal definition. In contrast, the term “health reimbursement account” is not a legally recognized term so some people may choose to take liberties in the usage of the phrase and define it as they wish. Our interpretation, we believe, represents the consensus of the employee benefit profession. Yet we are aware that some benefits salespeople deliberately interchange the use of these two terms to facilitate sales-related discussions. (It makes sense to have two phrases describe what you are selling rather than take the time that to say that you can not sell one of the two and then describe the difference).

Other resources:

article: “How to establish separate employee bank accounts in a small business HRA plan

Five Strategies to Avoid Shared Responsibility Payments under the Affordable Care Act

If your business is worried about the potential cost of shared responsibility payments in 2015, you are not alone. Perhaps your company does not offer group health insurance now or your employee health plan does not meet the minimum essential coverage requirements under the Affordable Care Act (ACA). Now with only 90 days until the new tax penalty becomes effective, mid-sized employers are scrambling to find an affordable strategy. Transitional relief provisions help businesses in 2015, especially those with 50-99 employees. Employers in low margin industries like retail and food service have already begun testing these defensive cost control strategies so we now have a limited amount of experience to make these suggestions.

The basic underlying requirement is that beginning January 1, 2015 an employer with 100 or more full time employer’s must offer health insurance to avoid the shared responsibility payment. That health coverage must: a) be available to 70% of full time employees, b) meet minimum value rules, and c) cost less than 9.5% of an employees total household income. The rules get much tougher in 2016, encompassing employers with 50 or more employees and requiring coverage for 95% of employees and dependents. The penalty calculation formula also changes in 2016 resulting in a hike in the employer’s penalty.

The employer shared responsibility penalty is large enough to scare any small business owner. The minimum employer shared responsibility penalty for an employer who provides no health coverage in 2015 is $40,000 for a company with 100 employees. The penalty rises by $2,000 for each employee above that. In 2016 the penalty increases sharply due to the expiration of transition rules that are not discussed in this article. An alternate penalty is available if the employer provides some health coverage but this coverage fails one or more of the requirements of the law. In most cases the alternate penalty is lower than the regular employer shared responsibility payment.

This checklist below assumes that your goal is to reduce the maximum cost of ACA compliance to dollar amount that is less than the amount of the penalty1 and that you have already determined that your firm is large enough to trigger the shared responsibility payment requirement. It also assumes that the price of minimum value group health insurance is greater than the calculated tax penalty; that providing the plan as proposed by ACA would be the highest cost approach and is not practical for the employer.

Five strategies to consider:

  1. Offer employee health coverage at the maximum price of 9.5% of an employee’s total household income.2 Employers can stipulate and control the price of employee health coverage by combining insurance with a Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA), or both. Early experience indicates that few employees will enroll in coverage at that highest price allowed under the law, especially in lower wage industries. The business is not penalized on the employees who are offered coverage but decline to enroll.
  2. Change to part time employees so that insurance is not required. Many firms have already adopted this approach by reducing work schedules below 30 hours per week.
  3. Use independent contractors to outsource tasks formerly handled by employees.
  4. Turn employees into their own self-employed business segments.
  5. Offer mini-med insurance. This is still allowed in most states until 2015 and is less expensive than Obamacare plans. It covers basic health expenses but not catastrophic or chronic treatment claims. This strategy preserves the employees’ rights to obtain primary coverage through the exchange. In this case the alternate penalty is $3,000 for each employee who receives a subsidy on the exchange. In most cases this will be substantially less than the regular shared responsibility payment.3

Business managers may conclude that none of the options are really attractive. We understand that implementation of the Affordable Care Act will take a toll on almost everyone except for those who receive subsidized coverage.

Finally, If you use any of these cost-saving approaches, it makes sense to pair your strategy with an employee health benefits consulting service. Make sure it is an independent service, not affiliated with the provider of your health insurance. find an independent adviser whose only interest is advising your employees on the best coverage options and how to pay for it. Remember that ACA implementation is challenging for everyone and it makes sense to provide someone who can bear the bulk of employee concerns with their changing coverage. This service costs less than 10% of the penalty (because not all of the employees actually use it) but goes a long way toward rebuilding employee financial confidence.

Footnotes

1When most employees earn less than 400% of federal poverty level, as is common in retail, food service, agriculture and other industries, it still makes sense to just pay the penalty. You’ll be doing your employees a huge financial favor because they will qualify for larger subsidies and, as a result, enjoy lower cost coverage through the exchange than the employer could ever offer. Many of the nation’s major employees have already selected this option and more are likely to follow.

2Since employers generally do not know an employees total household income, most employers will rely on a safe harbor provision where the calculation uses the employee’s income only. However, there is no prohibition on using the employee’s total household income as stated in the law. This is best accomplished by adopting a health care planning service as described in the past paragraph of the article.

3This cost savings concept is well illustrated in graphical format in an Employer Mandate Fact Sheet by Cigna.

HRAs in the new health insurance marketplace

Summary: The individual mandate provision of the Affordable Care Act is likely to trigger more small business owners to offer financial help to employees with the cost of required health insurance, but this reaction may not be simple. Coverage will be available through insurance exchanges. Traditional employer funding approaches like Health Reimbursement Arrangements (HRA) and Flexible Spending Accounts (FSA) are both limited by the Affordable Care Act. A combination of health plans possibly including a HRA, FSA, Health Savings Account (HSA) and Medical Spending Reimbursement Plan (MERP) may be used in combination to provide best results. Freedom Benefits offers these individually or in combination for free or at little cost to small businesses through the payroll system. Administration and tax treatment regulations do not change substantially for employers in 2014 but employees may see some or all their employer-paid health insurance benefits become taxable in 2014.
9/13/2013 – Small business owners typically wish to enable their employees to access the best value in health insurance that is available in their local market and then often wish to help cover part of the cost of that insurance. In the past, this goal was accomplished with a two-step strategy:

The first step is to arrange for the employees to have access to a well-qualified professional enroller for personal assistance in finding the best plans on the online health insurance marketplace.

The second step to set up a tax-qualified Health Reimbursement Arrangement (HRA) to allow the employer to pay for part of the coverage. This is a tax-qualified employee benefit plan that, if designed and administered properly, allows employer contributions to be deductible by the employer without becoming taxable wages to the employee.

Beginning in 2014 HRAs may no longer be used to integrate with essential health benefit plans offered through the insurance exchanges. HRAs will likely grow in popularity as the preferred method of providing excepted benefits to employees like limited medical insurance. The insurance and employee benefit market is making adjustments to ensure that products and services for small business may continue to enjoy tax-favored status. Most HRA plans will be modified to comply with the new laws and other plans will provide health benefits that are taxable to employees. Best results may be obtained by combining a HRA with other plans like a Flexible Spending Account (FSA) and Health Savings Account (HSA).

Freedom Benefits offers these plans individually or in combination without charge to small businesses that use affiliated insurance services.

This page is an annotated version of U.S. Department of Labor Technical Release No. 2013-03 released September 13, 2013. The author’s annotations highlighted in yellow below are meant to emphasize provisions that commonly trigger questions from small business owners and clients of Freedom Benefits who plan to have employees use the individual health insurance exchanges offered by the federal government, state governments as well as private commercial health insurance companies, and then help employees pay for the cost of that health insurance with employer funds. The comments envision the situation where the employees enroll individually on an exchange rather than in a group insurance plan.

Freedom Benefits offers free HRA, HSA, FSA, MERP and other health plan setup, payroll integration and claim administration for small businesses that take this approach and use the Members’ Insurance Exchange (or their soon-to-be-announced new private insurance exchange service) for insurance coverage in 2014. Details of this offer have not been announced but will be posted on this site as soon as possible shortly after the new health insurance exchange system launches. In the meanwhile, please email tonynovakcpa@gmail.com for more information.

Application of Market Reform and other Provisions of the Affordable Care Act to HRAs, Health FSAs, and Certain other Employer Healthcare Arrangements

I. Purpose and Overview

This Technical Release provides guidance on the application of certain provisions of the Affordable Care Act(1) to the following types of arrangements: (1) health reimbursement arrangements (HRAs), including HRAs integrated with a group health plan; (2) group health plans under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy, such as a reimbursement arrangement described in Revenue Ruling 61-146, 1961-2 CB 25, or arrangements under which the employer uses its funds to directly pay the premium for an individual health insurance policy covering the employee (collectively, an employer payment plan); and (3) certain health flexible spending arrangements (health FSAs). This Technical Release also provides guidance on section 125(f)(3) of the Internal Revenue Code (Code) and on employee assistance programs or EAPs.

The Departments of the Treasury (Treasury Department), Health and Human Services (HHS), and Labor (DOL) (collectively, the Departments) are continuing to work together to develop coordinated regulations and other administrative guidance to assist stakeholders with implementation of the Affordable Care Act. The guidance in this Technical Release is being issued in substantially identical form by the Treasury Department, and guidance is being issued by HHS to reflect that HHS concurs in the application of the laws under its jurisdiction as set forth in this Technical Release.

II. Background

A. Health Reimbursement Arrangements

An HRA is an arrangement that is funded solely by an employer and that reimburses an employee for medical care expenses (as defined under Code § 213(d)) 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. IRS Notice 2002-45, 2002-02 CB 93; Revenue Ruling 2002-41, 2002-2 CB 75. This reimbursement is 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 generally are considered to be group health plans within the meaning of Code § 9832(a), § 733(a) of the Employee Retirement Income Security Act of 1974 (ERISA), and § 2791(a) of the Public Health Service Act (PHS Act) and are subject to the rules applicable to group health plans.

B. Employer Payment Plans

Novak: Internal Revenue Code section 105 is the provision of the tax code that allows a tax deduction for the employer’s payment of a health insurance premium as an ordinary business expense. This is not changed by the Affordable Care Act.  Because of this, some reference to the term “Section 105 medical reimbursement plan” or “MERP” may become popular in the small business market. This simply means a plan that makes tax-deductible employer payments for employee health expenses. Unless otherwise qualified, the amount of the benefits paid under a Section 105 plan are taxable to the employees.

Revenue Ruling 61-146 holds that if an employer reimburses an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance, the payments are excluded from the employee’s gross income under Code §106.

Novak: Most of the following changes in tax treatment discussed in this regulation pertain to IRC section 106, the tax treatment of the payment with regard to the employee.

This exclusion also applies if the employer pays the premiums directly to the insurance company. An employer payment plan, as the term is used in this Technical Release, 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. Individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan, if the standards of the DOL’s regulation at 29 C.F.R. §2510.3-1(j) are met.

Novak: It is always possible to set up an after-tax employee health plan without the restrictions imposed by this body of tax and labor law.  Non-adherence to the federal requirements does not destroy the employee health plan, it only takes away it’s tax benefits. The more challenging goal, however, is usually to have a successful pre-tax employee health plan that meets the employer’s and employees’ requirements.

C. Health Flexible Spending Arrangements (Health FSAs)

In general, a health FSA is a benefit designed to reimburse employees for medical care expenses (as defined in Code § 213(d), other than premiums) incurred by the employee, or the employee’s spouse, dependents, and any children who, as of the end of the taxable year, have not attained age 27. See Employee Benefits—Cafeteria Plans, 72 Fed. Reg. 43938, 43957 (August 6, 2007) (proposed regulations; to be codified, in part, once final, at 26 C.F.R. §1.125-5); Code §§ 105(b) and 106(f). Contributions to a health FSA offered through a cafeteria plan satisfying the requirements of Code § 125 (a Code § 125 plan) do not result in gross income to the employee. Code § 125(a). While employees electing coverage under a health FSA typically also elect to enter into a salary reduction agreement, employers may provide additional health FSA benefits in excess of the salary reduction amount. See Employee Benefits—Cafeteria Plans, 72 Fed. Reg. 43938, 43955-43957 (August 6, 2007) (proposed regulations; to be codified, in part, once final, at 26 C.F.R. §§1.125-1(r), 1.125-5(b)). For plan years beginning after December 31, 2012, the amount of the salary reduction is limited by Code §125(i) to $2,500 (indexed annually for plan years beginning after December 31, 2013). See IRS Notice 2012-40, 2012-26 IRB 1046, for more information about the application of the limitation. Additional employer contributions are not limited by Code §125(i).

Novak: Flexible Spending Accounts (FSAs) are still a viable option for small firms, but employees are limited to contributions of $2,500 per year. Also, the use it or lose it” provision remains, detracting from the usefulness of these plans. FSAs must be voluntary salary reduction plans and do not allow contributions from the employer.

The Code, ERISA, and the PHS Act impose various requirements on group health plans, but certain of these requirements do not apply to a group health plan in relation to its provision of excepted benefits. Code § 9831(b), ERISA § 732(b), PHS Act §§ 2722(b) and 2763. Although a health FSA is a group health plan within the meaning of Code §9832(a), ERISA § 733(a), and PHS Act § 2791(a), a health FSA may be 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, but only if 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). 26 C.F.R. §54.9831-1(c)(3)(v), 29 C.F.R. §2590.732(c)(3)(v), and 45 C.F.R. §146.145(c)(3)(v).

Novak: Most of the innovation in insurance and non-insured employee health plans for small businesses over the coming years is expected to be in “excepted benefits”, meaning that most of these Affordable Care Act provisions will not apply.

D. Affordable Care Act Guidance

1. Market Reforms – In General

The Affordable Care Act contains certain market reforms that apply to group health plans (the market reforms).(2) In accordance with Code § 9831(a)(2) and ERISA §732(a),the market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year, and, in accordance with Code §9831(b), ERISA § 732(b), and PHS Act §§2722(b) and 2763, the market reforms also do not apply to a group health plan in relation to its provision of excepted benefits described in Code §9832(c), ERISA §733(c) and PHS Act §2791(c).(3) 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.

The market reforms specifically addressed in this Technical Release are:(4)

(a) PHS Act § 2711 which provides that a group health plan (or a health insurance issuer offering group health insurance coverage) may not establish any annual limit on the dollar amount of benefits for any individual—this rule does not prevent a group health plan, or a health insurance issuer offering group health insurance coverage, from placing an annual limit, with respect to any individual, on specific covered benefits that are not essential health benefits(5) to the extent that such limits are otherwise permitted under applicable law (the annual dollar limit prohibition); and

Novak: This dollar limitation provision is the key that makes most traditional HRAs ineffective in 2014.

(b) PHS Act § 2713 which requires non-grandfathered group health plans (or health insurance issuers offering group health insurance plans) to provide certain preventive services without imposing any cost-sharing requirements for these services (the preventive services requirements).

2. Prior Guidance on the Application of the Market Reforms to HRAs

The preamble to the interim final regulations implementing the annual dollar limit prohibition states that 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, the fact that benefits under the HRA by itself are limited does not fail to comply with the annual dollar limit prohibition because the combined benefit satisfies the requirements. Further, the preamble states that in the case of a standalone HRA that is limited to retirees, the exemption from the requirements of the Code and ERISA relating to the Affordable Care Act for plans with fewer than two current employees means that the retiree-only HRA is not subject to the annual dollar limit prohibition. 75 Fed. Reg. 37188, 37190-37191 (June 28, 2010).

On January 24, 2013, the Departments issued FAQs that address the application of the annual dollar limit prohibition to certain HRA arrangements (HRA FAQs).(6) In the HRA FAQs, the Departments state that 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.

Novak: This describes an HRA that runs alongside an employer-sponsored group insurance plan. This strategy is popular today but will remain viable only in local markets where a competitive small group insurance market remains after 2014. We have no way of predicting this in advance.

Further, the HRA FAQs indicate that the Departments intend to issue guidance providing that:

(b) an employer-sponsored HRA may be treated as integrated with other coverage only if the employee receiving the HRA is actually enrolled in the coverage, and any HRA that credits additional amounts to an individual, when the individual is not enrolled in primary coverage meeting the annual dollar limit prohibition provided by the employer, will fail to comply with the annual dollar limit prohibition.

The HRA FAQs also state that the Departments anticipate that future guidance will provide that, 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 with the annual dollar limit prohibition. 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.

3. Prior Guidance on the Application of the Market Reforms to Health FSAs

Under the interim final rules implementing the annual dollar limit prohibition, a health FSA, as defined in Code § 106(c)(2), is not subject to the annual dollar limit prohibition. See 26 C.F.R. §54.9815-2711T(a)(2)(ii), 29 C.F.R. §2590.715-2711(a)(2)(ii), and 45 C.F.R. §147.126(a)(2)(ii). See Q&A 8 of this Technical Release limiting the exemption from the annual dollar limit prohibition to a health FSA that is offered through a Code § 125 plan.

4. Prior Guidance on the Application of Code §§ 36B and 5000A

Section 36B of the Code allows a premium tax credit to certain taxpayers who enroll (or whose family members enroll) in a qualified health plan (QHP) through an Affordable Insurance Exchange (referred to in this Technical Release as an Exchange, and also referred to in other published guidance as a Marketplace). The credit subsidizes a portion of the premiums for the QHP. In general, the premium tax credit may not subsidize coverage for an individual who is eligible for other minimum essential coverage. If the minimum essential coverage is eligible employer-sponsored coverage, however, an individual is treated as eligible for that coverage only if the coverage is affordable and provides minimum value or if the individual enrolls in the coverage.

Coverage provided through Code § 125 plans, employer payment plans, health FSAs, and HRAs are eligible employer-sponsored plans and, therefore, are minimum essential coverage, unless the coverage consists solely of excepted benefits. See Code § 5000A(f)(2) and Treas. Reg. §1.5000A-2, 78 Fed. Reg. 53646, 53658 (August 30, 2013).

Amounts newly made available for the current plan year under an HRA that is integrated with an eligible employer-sponsored plan and that an employee may use to pay premiums are counted for purposes of determining affordability of an eligible employer-sponsored plan under Code § 36B. See Minimum Value of Eligible Employer-Sponsored Plans and Other Rules Regarding the Health Insurance Premium Tax Credit, 78 Fed. Reg. 25909, 25914 (May 3, 2013) (proposed regulations; to be codified, in part, once final, at 26 C.F.R. §1.36B-2(c)(3)(v)(A)(5)). Amounts newly made available for the current plan year under an HRA that is integrated with an eligible employer-sponsored plan are counted toward the plan’s minimum value percentage for that plan year if the amounts may be used only to reduce cost-sharing for covered medical expenses and the amount counted for this purpose is the amount of expected spending for health care costs in a benefit year. See Minimum Value of Eligible Employer-Sponsored Plans and Other Rules Regarding the Health Insurance Premium Tax Credit, 78 Fed. Reg. 25909, 25916 (May 3, 2013) (proposed regulations; to be codified, in part, once final, at 26 C.F.R. §1.36B-6(c)(4), (c)(5)). See Q&A 11 of this Technical Release for more explanation of the application of these rules to HRAs and other arrangements.

III. Guidance

A. Guidance on HRAs and Certain other Employer Healthcare Arrangements, Health FSAs, and Employee Assistance Programs or EAPs Under the Joint Jurisdiction of the Departments

1. Application of the Market Reform Provisions to HRAs and Certain other Employer Healthcare Arrangements

Question 1: The HRA FAQs provide that an employer-sponsored HRA cannot be integrated with individual market coverage, and, therefore, an HRA used to purchase coverage on the individual market will fail to comply with the annual dollar limit prohibition. May other types of group health plans used to purchase coverage on the individual market be integrated with that individual market coverage for purposes of the annual dollar limit prohibition?

Answer 1: No. A group health plan, including an HRA, used to purchase coverage on the individual market is not integrated with that individual market coverage for purposes of the annual dollar limit prohibition.

For example, a group health plan, such as an employer payment plan, that reimburses employees for an employee’s substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. However the employer payment plan will fail to comply with the annual dollar limit prohibition because (1) an employer payment plan is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement, and (2) an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement.

Question 2: How do the preventive services requirements apply to an HRA that is integrated with a group health plan?

Answer 2: Similar to the analysis of the annual dollar limit prohibition, an HRA that is integrated with a group health plan will comply with the preventive services requirements if the group health plan with which the HRA is integrated complies with the preventive services requirements.

Question 3: The HRA FAQs provide that an employer-sponsored HRA cannot be integrated with individual market coverage, and, therefore, an HRA used to purchase coverage on the individual market will fail to comply with the annual dollar limit prohibition. May a group health plan, including an HRA, used to purchase coverage on the individual market be integrated with that individual market coverage for purposes of the preventive services requirements?

Answer 3: No. A group health plan, including an HRA, used to purchase coverage on the individual market is not integrated with that individual market coverage for purposes of the preventive services requirements.

For example, a group health plan, such as an employer payment plan, that reimburses employees for an employee’s substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. However, the employer payment plan will fail to comply with the preventive services requirements because (1) an employer payment plan does not provide preventive services without cost-sharing in all instances, and (2) an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement.

Question 4: Under what circumstances will an HRA be integrated with another group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements?

Answer 4: An HRA will be integrated with a group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements if it meets the requirements under either of the integration methods described below. Pursuant to this Technical Release, under both methods, integration does 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, if applicable.

Integration Method: Minimum Value Not Required

An HRA is integrated with another group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements 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 (for example, the HRA may be offered only to employees who do not enroll in the employer’s group health plan but are enrolled in other non-HRA group coverage, such as a plan maintained by the employer of the employee’s spouse); (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 (as defined under Code § 213(d)) 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. This opt-out feature is required because the benefits provided by the HRA generally will constitute minimum essential coverage under Code § 5000A (see Q&A 10 of this Technical Release) and will therefore preclude the individual from claiming a Code § 36B premium tax credit.

Integration Method: Minimum Value Required

Alternatively, an HRA that is not limited with respect to reimbursements as required under the integration method expressed above is integrated with a group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements if (1) the employer offers a group health plan to the employee that provides minimum value pursuant to Code § 36B(c)(2)(C)(ii); (2) the employee receiving the HRA is actually enrolled in a group health plan that provides minimum value pursuant to Code § 36B(c)(2)(C)(ii), 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 (for example, the HRA may be offered only to employees who do not enroll in the employer’s group health plan but are enrolled in other non-HRA MV group coverage, such as a plan maintained by an employer of the employee’s spouse); 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.

Example (Integration Method: Minimum Value Not Required)

Facts. Employer A sponsors a group health plan and an HRA for its employees. Employer A’s HRA is available only to employees who are either enrolled in its group health plan or in non-HRA group coverage through a family member. Employer A’s HRA is limited to reimbursement of co-payments, co-insurance, deductibles, and premiums under Employer A’s group health plan or other non-HRA group coverage (as applicable), as well as medical care (as defined under Code § 213(d)) that does not constitute essential health benefits. Under the terms of Employer A’s HRA, an employee is permitted to permanently opt out of and waive future reimbursements from the HRA both upon termination of employment and at least annually.

Employer A employs Employee X. Employee X chooses to enroll in non-HRA group coverage sponsored by Employer B, the employer of Employee X’s spouse, instead of enrolling in Employer A’s group health plan. Employer A and Employer B are not treated as a single employer under Code § 414(b), (c), (m), or (o). Employee X attests to Employer A that he is covered by Employer B’s non-HRA group coverage. When seeking reimbursement under Employer A’s HRA, Employee X attests that the expense for which he seeks reimbursement is a co-payment, co-insurance, deductible, or premium under Employer B’s non-HRA group coverage or medical care (as defined under Code § 213(d)) that is not an essential health benefit.

Conclusion. Employer A’s HRA is integrated with Employer B’s non-HRA group coverage for purposes of the annual dollar limit prohibition and the preventive services requirements.

Example (Integration Method: Minimum Value Required)

Facts. Employer A sponsors a group health plan that provides minimum value and an HRA for its employees. Employer A’s HRA is available only to employees who are either enrolled in its group health plan or in non-HRA MV group coverage through a family member. Under the terms of Employer A’s HRA, an employee is permitted to permanently opt out of and waive future reimbursements from the HRA both upon termination of employment and at least annually.

Employer A employs Employee X. Employee X chooses to enroll in non-HRA MV group coverage sponsored by Employer B, the employer of Employee X’s spouse, instead of enrolling in Employer A’s group health plan. Employer A and Employer B are not treated as a single employer under Code § 414(b), (c), (m), or (o). Employee X attests to Employer A that he is covered by Employer B’s non-HRA MV group coverage and that the coverage provides minimum value.

Conclusion. Employer A’s HRA is integrated with Employer B’s non-HRA MV group coverage for purposes of the annual dollar limit prohibition and the preventive services requirements.

Question 5: May an employee who is covered by both an HRA and a group health plan with which the HRA is integrated, and who then ceases to be covered under the group health plan that is integrated with the HRA, be permitted to use the amounts remaining in the HRA?

Answer 5: Whether or not an HRA is integrated with other group health plan coverage, 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 ceases to be covered by other integrated group health plan coverage without causing the HRA to fail to comply with the market reforms. Note that coverage provided through an HRA, other than coverage consisting solely of excepted benefits, is an eligible employer-sponsored plan and, therefore, minimum essential coverage under Code § 5000A.

Question 6: Does an HRA impose an annual limit in violation of the annual dollar limit prohibition if the group health plan with which an HRA is integrated does not cover a category of essential health benefits and the HRA is available to cover that category of essential health benefits (but limits the coverage to the HRA’s maximum benefit)?

Answer 6: In general, an HRA integrated with a group health plan imposes an annual limit in violation of the annual dollar limit prohibition if the group health plan with which the HRA is integrated does not cover a category of essential health benefits and the HRA is available to cover that category of essential health benefits and limits the coverage to the HRA’s maximum benefit. This situation should not arise for a group health plan funded through non-grandfathered health insurance coverage in the small group market, as small group market plans must cover all categories of essential health benefits, with the exception of pediatric dental benefits, if pediatric dental benefits are available through a stand-alone dental plan offered in accordance with 45 C.F.R. §155.1065.(7)

However, under the integration method available for plans that provide minimum value described under Q&A 4 of this Technical Release, if a group health plan provides minimum value under Code § 36B(c)(2)(C)(ii), an HRA integrated with that group health plan will not be treated as imposing an annual limit in violation of the annual dollar limit prohibition, even if that group health plan does not cover a category of essential health benefits and the HRA is available to cover that category of essential health benefits and limits the coverage to the HRA’s maximum benefit.

2. Application of the Market Reforms to Certain Health FSAs

Question 7: How do the market reforms apply to a health FSA that does not qualify as excepted benefits?

Answer 7: The market reforms do not apply to a group health plan in relation to its provision of benefits that are excepted benefits. Health FSAs are group health plans but 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 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 the participant’s salary reduction election).(8) See 26 C.F.R. §54.9831-1(c)(3)(v), 29 C.F.R. §2590.732(c)(3)(v), and 45 C.F.R. § 146.145(c)(3)(v). Therefore, a health FSA that is considered to provide only excepted benefits is not subject to the market reforms.

If an employer provides a health FSA that does not qualify as excepted benefits, the health FSA generally is subject to the market reforms, including the preventive services requirements. Because a health FSA that is not excepted benefits is not integrated with a group health plan, it will fail to meet the preventive services requirements.(9)

The Departments understand that questions have arisen as to whether HRAs that are not integrated with a group health plan may be treated as a health FSA as defined in Code §106(c)(2). Notice 2002-45, 2002-02 CB 93, states that, assuming that the 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, an HRA is a health FSA as defined in Code § 106(c)(2). This statement was intended to clarify the rules limiting the payment of long-term care expenses by health FSAs. The Departments are also considering whether an HRA may be treated as a health FSA for purposes of the exclusion from the annual dollar limit prohibition. In any event, the treatment of an HRA as a health FSA that is not excepted benefits would not exempt the HRA from compliance with the other market reforms, including the preventive services requirements, which the HRA would fail to meet because the HRA would not be integrated with a group health plan. This analysis applies even if an HRA reimburses only premiums.

Question 8: The interim final regulations regarding the annual dollar limit prohibition contain an exemption for health FSAs (as defined in Code § 106(c)(2)). See 26 C.F.R. §54.9815-2711T(a)(2)(ii), 29 C.F.R. §2590.715-2711(a)(2)(ii), and 45 C.F.R. §147.126(a)(2)(ii). Does this exemption apply to a health FSA that is not offered through a Code § 125 plan?

Answer 8: No. The Departments intended for this exemption from the annual dollar limit prohibition to apply only to a health FSA that is offered through a Code §125 plan and thus subject to a separate annual limitation under Code § 125(i). There is no similar limitation on a health FSA that is not part of a Code § 125 plan, and thus no basis to imply that it is not subject to the annual dollar limit prohibition.

To clarify this issue, the Departments intend to amend the annual dollar limit prohibition regulations to conform to this Q&A 8 retroactively applicable as of September 13, 2013. As a result, a health FSA that is not offered through a Code § 125 plan is subject to the annual dollar limit prohibition and will fail to comply with the annual dollar limit prohibition.

3. Guidance on Employee Assistance Programs

Question 9: Are benefits under an employee assistance program or EAP considered to be excepted benefits?

Answer 9:The Departments intend to amend 26 C.F.R. §54.9831-1(c), 29 C.F.R. §2590.732(c), and 45 C.F.R. §146.145(c) to provide that benefits under an employee assistance program or 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. Excepted benefits are not subject to the market reforms and are not minimum essential coverage under Code § 5000A. Until rulemaking is finalized, through at least 2014, the Departments will consider an employee assistance program or EAP to constitute excepted benefits only if the employee assistance program or EAP does not provide significant benefits in the nature of medical care or treatment. For this purpose, employers may use a reasonable, good faith interpretation of whether an employee assistance program or EAP provides significant benefits in the nature of medical care or treatment.

B. Guidance Under the Sole Jurisdiction of the Treasury Department and the IRS on HRAs and Code § 125 Plans

Question 10: Is an HRA that has fewer than two participants who are current employees on the first day of the plan year (for example, a retiree-only HRA) minimum essential coverage for purposes of Code §§ 5000A and 36B?

Answer 10: Yes. The Treasury Department and the IRS understand that some employers are considering making amounts available under standalone retiree-only HRAs to retired employees so that the employer would be able to reimburse medical expenses, including the purchase of an individual health insurance policy. For this purpose, the standalone HRA would constitute an eligible employer-sponsored plan under Code §5000A(f)(2), and therefore the coverage would constitute minimum essential coverage under Code §5000A, for a month in which funds are retained in the HRA (including amounts retained in the HRA during periods of time after the employer has ceased making contributions). As a result, a retiree covered by a standalone HRA for any month will not be eligible for a Code § 36B premium tax credit for that month. Note that unlike other HRAs, the market reforms generally do not apply to a retiree-only HRA and therefore would not impact an employer’s choice to offer a retiree-only HRA.(10)

Question 11: How are amounts newly made available under an HRA treated for purposes of Code § 36B?

Answer 11: An individual is not eligible for individual coverage subsidized by the Code § 36B premium tax credit if the individual is eligible for employer-sponsored coverage that is affordable (premiums for self-only coverage do not exceed 9.5 percent of household income) and that provides minimum value (the plan’s share of costs is at least 60 percent). If an employer offers an employee both a primary eligible employer-sponsored plan and an HRA that would be integrated with the primary plan if the employee enrolled in the plan, 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. See Minimum Value of Eligible Employer-Sponsored Plans and Other Rules Regarding the Health Insurance Premium Tax Credit, 78 Fed. Reg. 25909, 25916 (May 3, 2013) (proposed regulations, to be codified, in part, once final, at 26 C.F.R.§1.36B-6(c)(4), (c)(5)). 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. See Minimum Value of Eligible Employer-Sponsored Plans and Other Rules Regarding the Health Insurance Premium Tax Credit, 78 Fed. Reg. 25909, 25914 (May 3, 2013) (proposed regulations; to be codified, in part, once final, at 26 C.F.R. §1.36B-2(c)(3)(v)(A)(5)).

Even if an HRA is integrated with a plan offered by another employer for purposes of the annual dollar limit prohibition and the preventive services requirements (see Q&A 4 of this Technical Release), the HRA does not count toward the affordability or minimum value requirement of the plan offered by the other employer. Additionally, if an employer offers an HRA on the condition that the employee does not enroll in non-HRA coverage offered by the employer and instead enrolls in non-HRA coverage from a different source, the HRA does not count in determining whether the employer’s non-HRA coverage satisfies either the affordability or minimum value requirement.

For purposes of the Code § 36B premium tax credit, the requirements of affordability and minimum value do not apply if an employee enrolls in any employer-sponsored minimum essential coverage, including coverage provided through a Code §125 plan, an employer payment plan, a health FSA, or an HRA, but only if the coverage offered does not consist solely of excepted benefits. See 26 C.F.R.§1.36B-2(c)(3)(vii). If an employee enrolls in any employer-sponsored minimum essential coverage, the employee is ineligible for individual coverage subsidized by the Code § 36B premium tax credit.

Question 12: Section 125(f)(3) of the Code, effective for taxable years beginning after December 31, 2013, provides that the term “qualified benefit” does not include any QHP (as defined in ACA § 1301(a)) offered through an Exchange.(11) This prohibits an employer from providing a QHP offered through an Exchange as a benefit under the employer’s Code §125 plan. Some states have already established Exchanges and employers in those states may have Code § 125 plan provisions that allow employees to enroll in health coverage through the Exchange as a benefit under a Code §125 plan. If the employer’s Code §125 plan operates on a plan year other than a calendar year, may the employer continue to provide the Exchange coverage through a Code §125 plan after December 31, 2013?

Answer 12: For Code § 125 plans that as of September 13, 2013 operate on a plan year other than a calendar year, the restriction under Code § 125(f)(3) will not apply before the first plan year of the Code § 125 plan that begins after December 31, 2013. Thus, for the remainder of a plan year beginning in 2013, a QHP provided through an Exchange as a benefit under a Code § 125 plan will not result in all benefits provided under the Code § 125 plan being taxable. However, individuals may not claim a Code § 36B premium tax credit for any month in which the individual was covered by a QHP provided through an Exchange as a benefit under a Code § 125 plan.

IV. Applicability Date and Reliance Period

This Technical Release applies for plan years beginning on and after January 1, 2014, but the guidance provided in this Technical Release may be applied for all prior periods. If legislative action by any State, local, or Indian tribal government entity is necessary to modify the terms of a pre-existing HRA, a health FSA that does not qualify as excepted benefits, an employer payment plan, or other similar arrangement, sponsored by any State, local, or Indian tribal government entity, as an employer, to avoid a failure to comply with the market reforms (including action to terminate such arrangement) and such action may only be taken by a State, local, or Indian tribal government entity legislative body, the applicability date of the portions of this Technical Release under which such arrangement would otherwise fail to comply with the market reforms is extended to the later of (1) January 1, 2014, or (2) the first day of the first plan year following the first close of a regular legislative session of the applicable legislative body after September 13, 2013.

V. For Further Information

The Departments have coordinated on the guidance and other information contained in this Technical Release. The guidance in this Technical Release is being issued in substantially identical form by the Treasury Department, and guidance is being issued by HHS to reflect that HHS concurs in the application of the laws under its jurisdiction as set forth in this Technical Release. Questions concerning the information contained in this Technical Release may be directed to the IRS at 202-927-9639 begin_of_the_skype_highlighting 202-927-9639 FREE end_of_the_skype_highlighting, the DOL’s Office of Health Plan Standards and Compliance Assistance at 202-693-8335 begin_of_the_skype_highlighting 202-693-8335 FREE end_of_the_skype_highlighting, or HHS at 410-786-1565 begin_of_the_skype_highlighting 410-786-1565 FREE end_of_the_skype_highlighting. Additional information for employers regarding the Affordable Care Act is available at www.healthcare.gov, www.dol.gov/ebsa/healthreform, and at www.business.usa.gov.

Footnotes

  1. The “Affordable Care Act” refers to the Patient Protection and Affordable Care Act (enacted March 23, 2010, Pub. L. No. 111-148) (ACA), as amended by the Health Care and Education Reconciliation Act of 2010 (enacted March 30, 2010, Pub. L. No. 111-152), and as further amended by the Department of Defense and Full-Year Continuing Appropriations Act, 2011 (enacted April 15, 2011, Pub. L. No. 112-10).
  2. Section 1001 of the ACA added new PHS Act §§ 2711-2719. Section 1563 of the ACA (as amended by ACA §10107(b)) added Code §9815(a) and ERISA § 715(a) to incorporate the provisions of part A of title XXVII of the PHS Act into the Code and ERISA, and to make them applicable to group health plans and health insurance issuers providing health insurance coverage in connection with group health plans. The PHS Act sections incorporated by these references are sections 2701 through 2728. Accordingly, these referenced PHS Act sections (i.e., the market reforms) are subject to shared interpretive jurisdiction by the Departments.
  3. See the preamble to the Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan Under the Patient Protection and Affordable Care Act, 75 Fed. Reg. 34538, 34539 (June 17, 2010). See also Affordable Care Act Implementation FAQs Part III, Question 1, available at http://www.dol.gov/ebsa/faqs/faq-aca3.html and at http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs3.html.
  4. The Departments previously addressed HRAs and the requirements under PHS Act § 2715 (summary of benefits and coverage and uniform glossary). See 77 Fed. Reg. 8668, 8670-8671 (February 14, 2012); see also Affordable Care Act Implementation FAQs Part VIII, Question 6, available at http://www.dol.gov/ebsa/faqs/faq-aca8.html and at http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs8.html and see page 1 of the Instruction Guide for Group Coverage, available at http://www.dol.gov/ebsa/pdf/SBCInstructionsGroup.pdf.
  5. See ACA § 1302(b) for the definition of “essential health benefits”.
  6. See Affordable Care Act Implementation FAQs Part XI, available at http://www.dol.gov/ebsa/faqs/faq-aca11.html and at http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs11.html.
  7. Small group market plans will not be considered to fail to meet qualified health plan certification standards based solely on the fact that they exclude coverage of pediatric dental benefits that are otherwise required under ACA § 1302(b)(1)(J) where a stand-alone dental plan is also available. See ACA § 1302(b)(4)(F) and Question 5, CMS QHP Dental Frequently Asked Questions, May 31, 2013, https://www.regtap.info/uploads/library/PM_QHP_DentalFAQsV2_5cr_060313.pdf.
  8. An HRA is paid for solely by the employer and not provided pursuant to salary reduction election or otherwise under a Code § 125 plan. IRS Notice 2002-45, 2002-02 CB 93.
  9. Under the interim final rules implementing the annual dollar limit prohibition, a health FSA is not subject to the annual dollar limit prohibition, regardless of whether the health FSA is considered to provide only excepted benefits. See 26 C.F.R. §54.9815-2711T(a)(2)(ii), 29 C.F.R. §2590.715-2711(a)(2)(ii), and 45 C.F.R. §147.126(a)(2)(ii). See Q&A 8 of this Technical Release regarding the restriction of the exemption from the annual dollar limit prohibition to a health FSA that is offered through a Code § 125 plan.
  10. See the preamble to the Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan Under the Patient Protection and Affordable Care Act, 75 Fed. 34538, 34539 (June 17, 2010).
  11. This rule does not apply with respect to any employee if the employee’s employer is a qualified employer (as defined in ACA § 1312(f)(2)) offering the employee the opportunity to enroll through an Exchange in a qualified health plan in a group market. See Code § 125(f)(3)(B).