The Latest Guidance on HRAs & FSAs Under Health Care Reform
On September 13, 2013, The Department of Treasury (IRS) and Department of Labor (DOL) released yet more guidance called The “Application of Market Reform and other Provisions of the Affordable Care Act to HRAs, Health FSAs, and Certain other Employer Healthcare Arrangements”. IRS Notice 2013-54 (which has substantially the same text as contained in the DOL release) addressed three major issues related to what is allowed in what the Departments label “account based reimbursement plans”. This Notice redefined allowable HRAs, clarified what FSAs can be exempt from the annual limit rules, and delivered a big surprise for Premium Reimbursement Plans.
All HRAs (other than retiree or excepted benefit HRAs) should be designed as integrated HRAs. Stand-alone HRAs are no longer permitted. Period. (See below for how that definition changed.)
Health FSAs offered as part of a cafeteria plan must be designed as “excepted benefits”. (See below for how a certain plan design can make the FSA lose its excepted status)
Employers may no longer reimburse employees for individual health insurance coverage on a pre-tax basis unless the employer is participating in a SHOP (Small Business Health Options Program).
Background: The Prohibition On Annual Limits And Account-Based Reimbursement Plans
A bit of background will help to understand the impact of the new guidance. The prohibition on annual limits was effective with the first plan year beginning on or after September 23, 2010. In guidance issued in 2010, the Departments (DOL & IRS) exempted FSAs offered as part of a cafeteria plan from the annual limit rules. The 2010 guidance also exempted certain HRAs, if the HRA could qualify as a health FSA as defined in Code Section 106, which included an HRA where “the maximum amount of reimbursement available to a participant under the plan cannot exceed 500% of the value of such coverage.”
Applying The Guidance From IRS Notice 2013-54
In IRS Notice 2013-54, the Departments clarify that the exemption from the annual limit rules was only intended to apply to health FSAs that are excepted benefits offered through a Code Section 125 (cafeteria) plan. The Notice also clearly stated that HRAs are generally subject to the prohibition on annual limits unless:
- It “is an HRA that 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”, or
- The HRA provides only excepted benefits.
What Are “Excepted Benefits”?
The most commonly applicable excepted benefits in account-based reimbursement plans include:
- Retiree-only plans that have less than two participants who are current employees as of the first day of the plan year;
- Plans that provide coverage (reimbursements) for benefits that are limited to dental, vision and long-term care benefits that are not an integral part of a group health plan; or
- Plans that are FSAs and the employer offers other group health plan coverage ( not just dental, vision or long term care coverage), where the maximum benefit payable to a participant under the FSA is less than or equal to the greater of: two times the participant’s salary reduction election under the arrangement for the year or $500.
Plans that are excepted benefits are not subject to the prohibition on annual limits, preventive care requirements and most other health care reform provisions. In general, most cafeteria plans do not have an employer contribution and so are excepted benefits if the employer offers other group health coverage; while most HRA plans and employer payment plans are not excepted benefits (unless the plan is a retiree-only plan) because employer contributions will typically exceed $500.
What Does This Mean, And What Action Might Be Required For Your FSA or HRA?
1. Integrated HRAs Redefined
What was new in the guidance was the definition of integrated HRAs. And surprisingly, the definition is broader than previously thought. The “other coverage” that an HRA can be integrated with can be the employer’s group health plan, or a spouse’s employer’s plan. From the guidance: “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.” (IRS Notice 2013-54 Q&A 4)
The guidance clearly provides that group health plans cannot be integrated with individual market coverage for purposes of the annual dollar limit prohibition (IRS Notice 2013-54, Q&A 1)
ACTION To Keep Your HRA: If your HRA covers employees enrolled in your Group Health Plan (GHP) then it is OK. If your HRA covers anyone else, you must require those participants to provide documentation of coverage under another plan, and that the coverage is group coverage (not individual).
2. Health FSAs offered as part of a cafeteria plan must be designed as excepted benefits:
This is not new: you cannot make an ER contribution greater than $500 or your FSA will lose its “excepted” status. This just wasn’t really a big deal before. Now it is. You just can’t do it. Period.
ACTION To Keep Your FSA:
a) If the only benefit you provide is an FSA (whether employer or employee funded) and you do not also provide a qualified group health plan, then you are done. No more FSA for you.
b) Keep employer contributions at $500 or below, or if greater, no more than 2 times the employee contributions (100% match).
c) If you want to make an employer contribution to participant’s health FSA that is greater than $500 or a 100% match of employee contributions, restructure your plan to convert it to an employer-funded HRA under Code Section 105. Then, as long is that HRA is integrated with your qualified GHP or the qualified GHP of another employer, it is permitted. If any participants are not enrolled in your GHP, you will need to get their affidavit that they are covered by another employer’s group health plan.
3. Employers May No Longer Reimburse Employees For Individual Health Insurance Coverage On A Pre-Tax Basis.
This was the big surprise of the Notice, since reimbursement of individually owned coverage has been allowed under a Section 125 plan since 1961.
ACTION To Keep Your Premium Reimbursement Arrangement (PRA) Or Individual Premium Account (IPA)
Sorry, there is no action you can take to make this compliant. This plan design is gone starting with the first new Plan Year after September 13, 2013. Employers may still reimburse premiums on an after-tax basis, though that is certainly not very attractive to employers as it would not be an allowable business expense deduction.
The only pretax premium assistance arrangements that may be offered are one of the following arrangements:
a) POP: a premium only plan, as defined in Treas. Reg. section 1.125-1(a)(5), “is a cafeteria plan that offers as its sole benefit an election between cash (for example, salary) and payment of the employee share of the employer-provided accident and health insurance premium (excludible from the employee’s gross income under section 106).”
b) SHOP Premium Reimbursement Plans: Code section 125(f) generally prohibits pre-tax payment of an employee’s share of individual policies purchased on an exchange. There is one exception — and that is for policies purchased through a Small Business Health Options Program (SHOP), since a SHOP is required to be offered under a Code Section 125 cafeteria plan. SHOPs are only available to small businesses (the size of the business eligible to participate can be variable depending upon the state’s exchange).
An employer can always choose to raise an employee’s taxable pay based upon the premiums they are paying for individual (or other) insurance.
This summary is our attempt to briefly summarize what you need to know about how this might affect a reimbursement account you have now – or plan for the future. But as they say, “the devil is in the details” and there is more than we could fit here. We strongly suggest you review the complete Notice 2013-54 and let us know if you have any questions.
NEO Clients Be Advised: If we are managing an HRA or FSA that might be affected by this new guidance, we will be contacting you directly to advise what steps you need to take to keep your plan in compliance going forward. The good news is we have creative ways to help you stay within the parameters established in our ever-changing regulations.