IRS Notice

DOL Technical Release

HHS Memorandum

The IRS and DOL have issued virtually identical guidance explaining how certain health care reform rules apply to—and restrict—HRAs and other employer-based arrangements for tax-advantaged funding of health care. This guidance elaborates on prior FAQs addressing integration of HRAs with a group health plan to avoid violating health care reform’s prohibition on annual dollar limits on essential health benefits. The new guidance is generally effective for plan years beginning on or after January 1, 2014 (but one of the requirements is effective immediately), and all can be relied upon for prior periods. In a separate memorandum, HHS has indicated its concurrence with the IRS and DOL guidance. The principal provisions of the guidance are summarized below:

• Integrating Employer Funding Arrangements With Individual Coverage. The previous FAQs prohibited integration between an HRA and individual insurance policies. This guidance reiterates that position and extends it to “employer payment plans,” defined as arrangements where the employer reimburses or directly pays employees’ premiums for individual health insurance policies, and excludes those amounts from the employees’ taxable income. These plans are deemed to impose dollar limits up to the cost of individual coverage purchased through them. Because these funding arrangements cannot be integrated with individual health insurance coverage, they violate health care reform’s prohibition on annual dollar limits (as well as the requirement to provide first-dollar preventive care).
• HRA Integration Defined. The guidance outlines two methods that HRAs can use to integrate with other group health plans to satisfy the annual dollar-limit prohibition and preventive services mandate. Both methods require that the HRA be available only to employees who are actually enrolled in the integrated non-HRA group coverage. One integration method limits use of the HRA to reimbursing co-payments, co-insurance, deductibles, and premiums under the integrated non-HRA group coverage, or to reimbursing medical care items that are not essential health benefits. The other method imposes no use restrictions, but requires that the non-HRA coverage satisfy health care reform’s minimum value requirement. Neither method requires that the HRA and non-HRA coverage have the same sponsor or plan document, or file a combined Form 5500. In order to give employees the chance to obtain premium tax credits, both methods require an annual opt-out and require either forfeiture of the HRA or an opt-out at termination of employment.
• Health FSA Exception to Annual Limit Rule Unavailable to HRAs. The guidance reserves the question of whether HRAs that are not integrated with non-HRA coverage can claim exemption from health care reform’s annual limit prohibition as health FSAs within the meaning of Code § 106(c)(2), but then appears to moot the point in two ways: first, by noting that non-integrated, nonexcepted HRAs will fail the preventive services mandate; and second, by limiting the annual limit exemption to health FSAs that are offered through a cafeteria plan. [Comment: HRAs cannot be offered under a cafeteria plan.] The guidance states that the annual limit regulations will be amended to retroactively apply the cafeteria-plans-only restriction as of September 13, 2013. The guidance also observes that nonexcepted health FSAs generally will fail to meet the preventive services mandate.
• Relief for EAPs. The guidance indicates that the applicable regulations will be amended to allow EAPs to be considered excepted benefits that are not subject to certain of the health care reform mandates or considered to be minimum essential coverage—but only if the EAP does not provide significant benefits in the nature of medical care or treatment.
• Other HRA Issues. The guidance explains that HRAs are eligible employer-sponsored plans that may be considered minimum essential coverage, and it explicitly affirms that a retiree covered by a retiree-only, standalone HRA will not be eligible for a premium tax credit for that reason, even though the standalone HRA is not subject to the health care reform mandates, and even if contributions have ceased. Also, although an HRA can be integrated with another employer’s non-HRA coverage under one of the methods described above, the HRA contributions cannot be used to determine the affordability or minimum value of the other employer’s non-HRA coverage. Moreover, an HRA sponsor cannot count its HRA contributions to determine the affordability or minimum value of its own non-HRA coverage if eligibility for its HRA is conditioned on employees’ declining its non-HRA coverage and getting non-HRA coverage elsewhere. Finally, if an HRA is integrated with a non-HRA health plan that excludes coverage for a category of essential health benefits and the HRA is available to cover the excluded category, the HRA will be considered to violate the annual limit rules for that category unless the non-HRA coverage provides minimum value.

Other provisions affirm that an employee’s use of a carried HRA balance after the employee is no longer covered by the non-HRA coverage will not cause the HRA to violate the health care reform mandates, and offer a transition rule for cafeteria plans that might have allowed employees to enroll in a qualified health plan offered through an Exchange, delaying the ban on such provisions until the first plan year beginning after 2013.

Comment: By denying employer payment plans the ability to integrate with individual health insurance coverage, the guidance effectively prohibits such arrangements, unless the individual coverage is limited to excepted benefits, the plan is offered only to retirees, or benefits are funded on an after-tax basis under the DOL’s safe harbor for voluntary plans. This will be a significant disappointment to employers who had hoped to use a pre-tax defined contribution approach to provide coverage with minimal effort. The guidance also puts the final nail in the coffin for many stand-alone HRAs, which can no longer cling to hope that the health FSA exemption from the annual limit rule will save them. Sponsors that have relied on the health FSA exemption should note the September 13 effective date for that portion of the guidance and quickly consider their alternatives. Integrated HRA sponsors may also need to move quickly to add the required opt-out feature. On the plus side, the guidance establishes much clearer guidelines for determining when an HRA will be integrated with other coverage, so employers that want to change their designs now have some guidelines, although the new rules have arrived terribly late in the game.