Effective September 13, 2013 IRS Notice 2013-54 Q8 clarifies that the exemption from the annual limit only applies to health FSAs offered through a Code section 125 plan. Please see our article Account-Based Health Reimbursement Plans and IRS Notice 2013-54 for more information.
On January 24, the Departments (Department of Labor, Health and Human Services and the Treasury) released FAQs About Affordable Care Act Implementation (Part XI). This set of FAQs clarifies that certain "integrated" Health Reimbursement Arrangements (HRAs) are not subject to the health care reform prohibition on annual limits - HRAs that are "integrated" with other coverage as part of a group health plan. An HRA that is not integrated with group health plan coverage is subject to the health care reform prohibition on annual limits unless certain exemptions apply. The guidance, however, does not discuss these other exemptions available to HRAs (small carve out of HRAs that are not subject to HIPAA Portability and the exemption for FSAs). This article will discuss the background of the health care reform prohibition on annual limits and how HRAs are affected, describe the recently clarified exemption for "integrated" HRAs and discuss alternative exemptions that we think may be more attractive to employers wishing to provide HRA benefits.
BackgroundProhibition on Annual Limits. Effective for plan years beginning after September 23, 2010, the Affordable Care Act prohibits annual limits on the dollar value of benefits for any participant or beneficiary. There is a transition period still in effect: maximum annual limit restrictions are allowed for plan years beginning after September 23, 2010 - January 1, 2014 (these maximums range from $750,000 - $2,000,000 through the transition period). This rule is found at Public Health Service (PHS) Act section 2711.
HRAs and Annual Limits. Health Reimbursement Arrangements are employer-funded reimbursement plans that typically reimburse participants/beneficiaries up to a set dollar amount for medical expenses (defined in Code section 213(d)) per year. The arrangements are very similar to health flexible spending arrangements available through cafeteria plans since both are subject to Code sections 105 and 106. The main differences are that (1) HRAs may allow carry-over of balances from year to year and (2) HRAs may not accept employee contributions.
Employers offer HRAs for a variety of reasons: many plans are designed to help pay for deductibles in an employer-sponsored high deductible health plan (HDHP); others are designed to fill in specific coverage gaps of a major medical plan (often to maintain coverage provided under a prior medical plan); and still others are simple reimbursement arrangements meant to assist employees with health care costs and can be used to reimburse employees for individual health care premiums or a wide range of medical expenses (where the employer may not provide other health benefits).
Exemption for HRAs That Are "Integrated"
The preamble to the interim final regulations (released June 28, 2010) implementing the prohibition on annual/lifetime limits clarified that HRAs "integrated" as part of a group health plan that does not have an annual limit would not be subject to this requirement "because the combined benefit satisfies the requirements." The term "integrated" was left undefined. The recent FAQs provide much-needed clarification of the term "integrated":
"... an HRA is not considered integrated with primary health coverage offered by the employer unless, under the terms of the HRA, the HRA is available only to employees who are covered by primary group health plan coverage provided by the employer and meeting the requirements of PHS Act section 2711."
The FAQs further clarify:
Q2: May an HRA used to purchase coverage on the individual market be considered integrated with that individual market coverage and therefore satisfy the requirements of PHS Act section 2711?
No. The Departments intend to issue guidance providing that for purposes of PHS Act section 2711, an employer-sponsored HRA cannot be integrated with individual market coverage or with an employer plan that provides coverage through individual policies and therefore will violate PHS Act section 2711.
Q3: If an employee is offered coverage that satisfies PHS Act section 2711 but does not enroll in that coverage, may an HRA provided to that employee be considered integrated with the coverage and therefore satisfy the requirements of PHS Act section 2711?
No. The Departments intend to issue guidance under PHS Act section 2711 providing that an employer-sponsored HRA may be treated as integrated with other coverage only if the employee receiving the HRA is actually enrolled in that coverage. Any HRA that credits additional amounts to an individual when the individual is not enrolled in primary coverage meeting the requirements of PHS Act section 2711 provided by the employer will fail to comply with PHS Act section 2711.
The requirement to integrate will mean that numerous employers will feel the need to redesign their benefits packages to ensure HRAs are meeting health care reform requirements. For example, many employers that offer reimbursements for HDHP deductibles make the amounts available to all employees even if the employee chooses not to participate in the HDHP (particularly since those employees are often saving the employer the shared premium cost). If these arrangements choose to utilize the exemption for integrated plans, the employees that do not take the employer-provided health insurance will lose out on the additional employer health benefits. The additional exemptions available to employers are explored in more detail below.
Note that the FAQs "anticipate" future guidance will provide a transition period for existing HRA plans that are not integrated:
Q4: How will amounts that are credited or made available under HRAs under terms that were in effect prior to January 1, 2014, be treated?
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 PHS Act section 2711. 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.
The FAQs fail to mention alternative mechanisms under which an HRA would not be subject to the prohibition on annual/lifetime limits. There is a small exemption for plans that are not subject to HIPAA Portability and an additional exemption in the interim final regulations for plans that are flexible spending arrangements (FSAs) under Code section 106(c)(2). We think the FSA exemption could be attractive to employers wishing to provide HRA benefits since it allows employers to have more flexibility over which employees are eligible for the benefits and does not require exluding employees that do not elect to be covered by an employer-sponsored plan (subject to Code section 105 non-discrimination rules, of course).
HRAs Not Subject to HIPAA Portability
The following HRA plans are not subject to HIPAA Portability and therefore are not subject to the prohibition on annual limits:
- Plans that have less than two participants who are current employees as of the first day of the plan year (retiree-only plans);
- 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
- The employer offers other group health plan coverage (that is not just dental, vision or long term care coverage) and the maximum benefit payable to a participant under the HRA is less than or equal to $500.
HIPAA Portability does apply to most HRA plans since most will have a maximum reimbursement amount greater than $500. It is worth noting, however, that retiree-only coverage and other limited coverage options are not subject to the prohibition on annual/lifetime limits.
Exemption for FSAsEffective September 13, 2013 IRS Notice 2013-54 Q8 clarifies that the exemption from the annual limit only applies to health FSAs offered through a Code section 125 plan.
One final exemption not discussed by the Departments in their guidance is the exemption for FSAs under section 54.9815-2711T(a)(2)(ii) of the interim final regulations ("A health flexible spending arrangement (as defined in section 106(c)(2)) is not subject to the requirement in paragraph (a)(2)(i) of this section [prohibition on annual limits]."). The vast majority of HRAs available in the marketplace would be able to utilize this exemption without having to significantly redesign their arrangements. Code section 106(c)(2) has two requirements that are in addition to the rules already applicable to HRAs:
- The HRA may not reimburse qualified long-term care services; and
- The maximum amount of reimbursement which is reasonably available to a participant for such coverage must be less than 500 percent of the value of such coverage.
For those plans that allow rollover of balances, there is currently not clear guidance on how to determine 5 times the value of coverage available under an HRA. We suggest using a model similar to that for COBRA coverage under Code section 4980. Perhaps the simplest way to meet the COBRA standard (without involving an actuary) would be to ensure that the maximum amount available in a plan year is less than 5 times the amount of reimbursements actually made in the prior plan year. The COBRA values are determined across the entire plan (not participant by participant).
The second requirement is likely already in line with the employer's intent for the HRA: if employees are not using the benefits (not seeking reimbursements), then the employer likely would want to reduce employer contributions in future years. Adding the FSA rule would require employers whose HRA plans allow rollover of unused balances to monitor plans each year and ensure the available balance in any year is not more than 5 times the amount of reimbursements actually made in the prior plan year.
Employers that want to continue to provide HRA benefits to employees who do not participate in the employer's health plan and employers that currently do not wish to provide a major medical plan to their employees should consider offering an HRA plan design that is also an FSA. HRA documents offered by ftwilliam.com do have an explicit checklist selection to make the HRA subject to the Code section 106(c)(2) rules (we call it the "FSA Failsafe"). Note that we plan to offer a free webinar on this topic March 28, 2013. Check our webinar page for details (webinar description and registration information to be posted soon).
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