On Friday, September 13, 2013, the IRS released Notice 2013-54 and the DOL issued Technical Release 2013-03 in substantially identical form. This guidance, which is generally effective January 1, 2014, provides much needed clarification on the application of certain provisions of the Patient Protection and Affordable Care Act (“ACA”) (annual limits and preventive care) to account-based plans such as HRAs and FSAs, and other types of arrangements that reimburse premiums (referred to in the guidance as “Employer Payment Plans”).
The guidance indicates that the agencies are generally viewing HRAs, FSAs, and Employer Payment Plans as group health plans for purposes of ACA. This means that these arrangements will qualify as “minimum essential coverage” for covered employees (i.e., they will preclude employees from receiving a premium credit), unless they are “excepted benefits” under HIPAA. This also means that these arrangements will need to comply with ACA’s annual dollar limit prohibition and preventive care requirements, unless they are integrated with a compliant group health plan (or are excepted benefits).
The guidance confirms that “retiree-only” HRAs continue to be excepted benefits (and therefore exempt from the annual dollar limit prohibition and preventive care rules). Health FSAs, on the other hand, are excepted benefits only 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 2x the participant’s salary reduction election for the FSA for the year (or, if greater, $500 plus the amount of the participant’s salary reduction election). Moreover, the guidance makes clear that an FSA that is otherwise an excepted benefit must be offered through a Section 125 cafeteria plan in order to be exempted from the annual dollar limit prohibition.
The guidance also provides that, at least through 2014, coverage under an employee assistance program (EAP) will be considered an “excepted benefit” as long as the EAP does not provide significant treatment in the nature of medical care or treatment. For this purpose, employers may use a reasonable, good faith interpretation of whether an EAP provides significant benefits in the nature of medical care or treatment.
The guidance permits employers to offer employees the choice of taxable compensation (cash) or an after tax payment to be applied to health coverage. Employers may establish a payroll practice of forwarding employee contributions to an insurance carrier without the arrangement being considered a group health plan; however, the arrangement generally must comply with the rules for “voluntary” plans under ERISA, with one such requirement being that the employees pay 100% of the cost of the coverage. These rules generally eliminate tax preferences for employers that wish to reimburse employees for the cost of individual health insurance policies.
The guidance provides clarification on a number of other issues, including when an HRA will be considered “integrated” with a group health plan for purposes of satisfying the annual dollar limit prohibition and preventive care requirements. One of the requirements to be an “integrated” HRA is that participants must have the ability to opt-out of the HRA on an annual basis. This is because the benefits provided by the HRA generally will constitute minimum essential coverage, which will preclude the individual from claiming a premium tax credit. The guidance further clarifies that a retiree covered by a standalone HRA for any month will not be eligible for a premium tax credit to purchase subsidized coverage through a Marketplace.
Notably, the guidance provides that a group health plan, including an HRA, will not be considered “integrated” with an individual health insurance policy for purposes of satisfying ACA’s annual dollar limit prohibition or preventive care rules. This means that employers will not be permitted to reimburse employees for the cost of individual insurance premiums on a non-taxable basis. In other words, if the HRA reimburses individual insurance policies, employers may not use the so-called “defined contribution” model, under which they would provide employees a tax-free pool of funds to use for the purchase of individual health insurance policies in the Marketplace or directly from a carrier.
This latest guidance has widespread implications for employers and plan sponsors. Employers should carefully consider these rules as they design their employee benefit plans for 2014.
However, some ambiguity remains – the rules for integrated HRAs seem to indicate that as long as an HRA is integrated with a group health plan, it may reimburse any medical expenses under Section 213(d) of the Internal Revenue Code, which would include individual insurance premiums. This seems in contrast to the general principles of the guidance; perhaps there will be a technical correction in the future that clarifies the application of this rule.