Notice 2013-54 (the “Notice”) provides guidance clarifying the impact of certain market reform provisions of the Affordable Care Act (“ACA”) on health reimbursement arrangements (“HRAs”) and other group health plans under which an employer reimburses or pays premium expenses for an individual health insurance policy (“Employer Payment Plans”). In general, the Notice prohibits using non-integrated (stand-alone) HRAs or Employer Payment Plans as a way for employees to pay for individual health insurance policies on a pre-tax basis. The Notice also discusses an exemption from the ACA market reform rules for health FSAs that meet the definition of “excepted benefits,” and provides a new exemption for employee assistance programs (“EAPs”). The guidance is generally effective for plan years beginning on and after January 1, 2014.

HRAs

An earlier FAQ issued by Treasury indicated that where an HRA participant is not enrolled in his or her employer’s major medical group health plan, the participant will not be considered to be enrolled in an “integrated” HRA, and such HRA will fail to satisfy certain ACA market reform requirements. The Notice re-affirms this position, defines the requirements necessary for an HRA to be considered integrated, and clarifies other issues.

  • No Integration with an Individual Health Insurance Policy – An HRA which is used to purchase an individual health insurance policy cannot be integrated with that individual policy. Therefore, an HRA used to purchase coverage on the individual market will violate the ACA market reform provisions prohibiting annual dollar limits and requiring preventive care services. Account-based arrangements, like an HRA, are generally incompatible with these requirements. The result is that a stand-alone HRA into which the employer deposits pre-tax dollars for the purpose of helping an active employee purchase an individual health insurance policy (i.e., a “defined contribution” approach) is not permitted.
  • Integration with a Group Health Plan – An HRA that is integrated with a group health plan complies with the annual dollar limitations and preventive service requirements to the extent that such group health plan itself complies with the annual dollar limitations and the preventive services requirements. An HRA is “integrated” with a group health plan only if it satisfies one of two integration alternatives. The first alternative applies where the group health plan does not provide “minimum value” (the plan’s share of costs does not equal at least 60%) and the second alternative applies where the group health plan does provide “minimum value”. The requirements applicable to each integration alternative are summarized below:

Click here to view table.

  • Application of the Affordability and Minimum Value Rules – An individual is not eligible for a premium tax credit if the individual is eligible for employer-sponsored coverage that is affordable (the premium for self-only coverage does not exceed 9.5% of household income) and that provides minimum value (the plan’s share of costs is at least 60%). The Notice clarifies when and how an employer can count contributions to an HRA for purposes of calculating whether its plan satisfies the affordability and/or minimum value requirements.
  1. Where an employer offers an HRA that is integrated with a group health plan (provided the employee enrolls in such group health plan), amounts newly made available under the HRA for the current plan year can be counted in determining whether such employer’s group health plan satisfies either the affordability requirement or the minimum value requirement, but not both. HRA contributions that can be used by the employee only to pay cost-sharing (i.e., co-payments and co-insurance) for covered medical expenses under the group health plan can only be counted toward the minimum value requirement, while HRA contributions that can be used to pay either premiums and/or cost-sharing, can be counted only toward the affordability requirement.
  2. Where an HRA is integrated with a group health plan offered by another employer (such as the employer of the employee’s spouse), the HRA contributions do not count toward the affordability or minimum value requirement of the group health plan offered by the other employer.
  3. Where an HRA is offered by an employer on the condition that the employee must refuse the coverage offered by the employer and instead enroll in non-HRA coverage from a different source, the employer cannot count the HRA contributions in determining either the affordability or minimum value of the employer’s group health plan.
  • Unused Amounts Credited to an HRA – Amounts credited to an HRA while such 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 the employee ceases to be covered by the integrated group health plan coverage without causing the HRA to fail to comply with the ACA market reforms. Note, however, that since the HRA coverage is considered to be minimum essential coverage, for any month such HRA continues, the employee will not be eligible for a premium tax credit when he or she purchases individual coverage through the health exchanges.
  • Retiree-only HRAs – Plans that cover only retired employees are not subject to the ACA market reform provisions. Therefore, stand-alone HRAs for retirees that reimburse medical expenses, or provide money to help purchase an individual health insurance policy for the retiree, remain viable. However, since the HRA is considered to be minimum essential coverage, the retiree will not be eligible for a premium tax credit for any 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).

Employer Payment Plans

The Notice clarifies that an Employer Payment Plan is a group health plan, and as such, must comply with the ACA market reforms. An Employer Payment Plan includes any pre-tax arrangement, including a cafeteria plan, to the extent the premiums are used to purchase individual health insurance. Like a stand-alone HRA, an Employer Payment Plan will not satisfy either the annual dollar limits or preventive care requirements. On the other hand, premium-only cafeteria plans that allow employees to pay their share of premiums for employer-sponsored group health plan coverage on a pre-tax basis continue to be permitted.

The Notice further confirms that certain practices do not constitute Employer Payment Plans, and therefore are not prohibited. These include: (i) employer-provided after-tax subsidies for the purchase of individual health insurance; and (ii) payroll practices established by an employer pursuant to which an employee’s individual health insurance premiums are forwarded to the insurer, as long as the premium payments are paid on an after-tax basis.

Health FSAs

The Notice clarifies that if an FSA provides only excepted benefits, the ACA market reform rules do not apply. A health FSA will be considered to provide only excepted benefits if (i) the employer also makes available group health plan coverage that is not limited to excepted benefits and (ii) the maximum benefit available to any participant under the health FSA does not exceed two times the participant’s salary reduction election for the health FSA for the year (i.e., 2 times $2500), or if greater, $500 plus the amount of the participant’s salary reduction election.

Employer Assistance Programs (“EAPs”)

Until final regulations are issued (and at least through 2014), as long as an EAP does not provide significant benefits in the nature of medical care or treatment, such EAP will be deemed to constitute excepted benefits, and therefore not subject to the ACA market reform rules. Employers may use a reasonable, good faith interpretation of whether an EAP provides significant benefits in the nature of medical care or treatment. Since it is not clear whether wellness programs would be considered to provide significant benefits in the nature of medical care or treatment, additional guidance is needed.

Conclusion

The Notice effectively prohibits stand-alone (non-integrated) HRAs and Employer Payment Plans, unless such an arrangement is designed to provide only excepted benefits, is offered only to retirees, or provides the benefits on an after-tax basis. Employers offering any type of account balance health plan or providing reimbursement for health insurance premiums should review those arrangements to determine whether they are subject to and comply with ACA. If not, employers will have to take prompt action to amend or terminate the arrangements. For example, to the extent retirees and active employees are covered under a single plan, it may be desirable to split the plan into active employee and retiree-only plans in order to preserve flexibility.

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