As we discuss in detail in our article Account-Based Health Reimbursement Plans and IRS Notice 2013-54, the Department of Treasury/Internal Revenue Service (IRS) and Department of Labor (DOL), collectively referred to as the "Departments", recently released updated guidance on 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 and DOL Technical Release 2013-03 - the text of the two releases is the same). The guidance clarifies a large number of issues that require action. Briefly, the guidance clarifies the following:

• All HRAs offering non-excepted benefits must be designed as integrated HRAs. Stand-alone HRAs offering non-excepted benefits are no longer permitted.
• Health FSAs offered as part of a cafeteria plan must be designed as excepted benefits.
• 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).

See the article for a detailed explanation of the above conclusions. This technical update applies these changes to our current HRA, Cafeteria and Premium Only Plan (POP) plan documents and recommends specific ways to complete the applicable checklists for permissible plan designs. We are also providing an update with respect to the amendments for transition relief from the cafeteria plan election rules.

Please also note that we are offering a free webcast October 24th at 1pm central time to cover these updates. If you cannot attend, a recording will be posted at our webinar page under "Past Webinars" a few days after the webcast.

All HRAs that are not offering excepted benefits must be designed as integrated HRAs. Stand-alone HRAs that are not excepted benefits are no longer permitted. As was described in the FAQs about Affordable Care Act Implementation Part XI released in January of 2013, stand-alone HRAs may only exist in 2014 as spend-down arrangements of balances first made available under the plan prior to 2014 (Q2-4). That guidance failed to address a number of questions about how HRAs fit under a number of health care reform rules - in particular the prohibition on annual limits. IRS Notice 2013-54 has clarified that non-integrated HRAs are subject to the annual limit prohibition as well as the preventive care requirements.

Existing HRAs (that are not already in compliance) have several options:

• Terminate the plan
• Spend-down the plan benefits (freeze new contributions to the plan)
• Redesign the plan to
  • become integrated with the employer's group health plan
  • offer only excepted benefits (most typically this would mean only benefiting retirees or only reimbursing dental and vision benefits)
  Redesigned plans could provide for forfeiture or spend-down of existing benefits and new contributions would be available under the new design.

Each of these options is discussed in turn below.

Spending-Down Benefits or Termination

Stand-Alone HRAs that do not provide for roll-over from year to year (as would be indicated under C.7a of the checklist) do not have the option to spend-down benefits. This is because Notice 2013-54 provides that HRAs may only be funded in 2013 "under the terms of an HRA as in effect on January 1, 2013."

You can find a sample amendment to terminate an HRA here. Before terminating a plan, you may want to consider the impact on other outside agreements like collective bargaining, employment agreements and state law (for non-ERISA plans).

You can find a sample amendment to spend-down an HRA here. The amendment provides an option to freeze participation. Note that freezing participation may result in non-discrimination issues, particularly if the HRA takes a few years to spend-down benefits.

To combine a spend-down with a plan redesign, you should remove the sentence "No additional contributions shall be made to the Plan" from the spend-down amendment and replace it with "Additional contributions will be credited according to the terms of the plan in effect as of __________". If the plan wishes to forfeit existing accounts, the plan could simply indicate that existing accounts are forfeited at the time the new plan design is adopted.

New/Continuing HRA Plans Offering Non-excepted Benefits Must be Drafted as Integrated HRAs

As IRS Notice 2013-54 provides, there are two methods to integrate HRA benefits with an employer-provided group health plan 1) minimum value not required and 2) minimum value required.

You can find a sample amendment to make an existing ftwilliam.com HRA plan an integrated plan here.

This sample incorporates options for the two types of integrated plans. Integrated plans are required to allow opt outs annually and/or as an irrevocable election (options are provided to allow for one or both opt outs). The sample also includes a model opt out form and SMM. The amendment keeps most HRA provisions unchanged. It replaces and supersedes Adoption Agreeement items B.1 - 13 (defining Eligible Employee, service requirements and entry dates) and C.1a-c (defining Eligible Expenses). Eligbility for former employees, covered persons, maximum benefits, deductibles, coinsurance and plan procedures are all unchanged by this amendment.

We assume this amendment would typically be used for existing HRAs that are already tied to a health plan of the employer where modifications to the dollar amount of benefits would not be necessary.

New HRAs created from ftwilliam.com will have the integration amendment language added automatically as an addendum. If you are creating a new HRA plan or need to significantly redesign the HRA benefits, we would suggest completing the normal HRA checklist, creating the document and completing the attached integration adendum. Adoption Agreement items B.1 - 13 and C.1a-c would thereby become inapplicable so these items can be ignored when going through the checklist. We do anticipate offering a more streamlined integrated HRA document option soon.

HRAs Offering Excepted Benefits Are Not Required to Be Integrated

Most HRAs offer benefits that are not excepted benefits. The excepted benefit rules are covered in detail at Treas. Reg. section 54.9831-1 (excepted benefits begin at paragraph (c)). The excepted benefits that would most commonly apply to HRAs are 1) plans that only benefit former employees and 2) plans that only cover dental and/or vision benefits. These plans would not need to be offered as an integrated HRA.

HRAs drafted as excepted benefits are generally free to design the HRA in any manner (subject to nondiscrimination rules) and would not need the amendments provided above.

To create a new HRA that only benefits former employees, B.1-13 would generally be completed with the applicable service requirements. B.13a/b (further modifications to the eligibility rules) could be used to clarify that Eligible Employees only enter the plan after termination and C.1c could be used to indicate that Eligible Expenses must be incurred after termination.

To create a new HRA offering only dental/vision (or other excepted) benefits, you must ensure that C.1 (Eligible Expenses) only describes excepted benefits. For example, you could select "Listed medical expenses" in C.1a and then list "dental and/or vision insurance premiums and expenses that are excludable from income under Code section 105(b)." in C.1d. (The sample language provided to define Eligible Expenses is quite broad but could be limited to meet the plan's needs.)

Please note: Because the guidance substantially limits the HRA designs that are permissible, we plan to redesign our HRA documents in 2014. We expect the redesigned HRA documents will offer the option of an integrated design or an excepted benefit design. If the integrated design in our model amendment does not meet your needs, please let us know so we can allow for other design changes in the new plan documents. In the meantime, we are attaching an integration addendum, SPD language and opt out form to the end of any newly created HRA Adoption Agreements. The integration addendum currently will require manual modifications since new checklist questions are not being added at this time.

Cafeteria plans offering health FSAs must ensure they qualify as excepted coverage and may no longer reimburse individual health plan premiums.

The excepted benefit rules are covered in detail at Treas. Reg. section 54.9831-1 (excepted benefits begin at paragraph (c)). The excepted benefit options that would most commonly apply to Cafeteria plans are:

• Plans that are FSAs and the employer offers other group health plan coverage (that is not just dental, vision or long term care coverage) where the maximum benefit payable to a participant under the health 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 provide coverage for benefits that are limited to dental and vision benefits that are not an integral part of a group health plan
• Coverage for only a specified disease or illness as long as
  • it is provided under a separate policy, certificate, or contract of insurance
  • there is no coordination between the provision of the benefits and an exclusion of benefits under any group health plan maintained by the same plan sponsor and
  • the benefits are paid with respect to an event without regard to whether benefits are provided with respect to the event under any group health plan maintained by the same plan sponsor
• Supplemental coverage - most typically Medicare Supplementary coverage and/or TRICARE supplement programs

This means a cafeteria plan offering a health FSA that reimburses non-excepted benefits (essentially benefits other than vision and dental) would not be in compliance unless the employer offers other group health coverage -- even if there are no employer contributions to the health FSA. In addition, 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) or the insurance is for a specified disease or illness or a supplement plan as described above.

To help ensure cafeteria plans are being drafted as excepted benefits we have added a few new edit checks/warnings to the system:

Checklist Item	Details	Warning/Error Text
A.10b.vi	If A.10a is "Yes", Contributions to pay premiums for individually-owned medical coverage are permitted	If "Yes" is selected: Error: Cafeteria plans may no longer allow contributions to pay premiums for individually-owned medical coverage. Please update A10b.vi to say "No".
A.15	Is the plan a Simple Cafeteria plan	If "Yes" is selected and the plan offers a Healthcare Reimbursement Account Warning:if A.15 is "Yes" (the plan is a simple plan) and the plan offers a Healthcare Reimbursement Account (A.11a is "Yes"), please ensure that employer contributions to the Healthcare Reimbursement Account are limited/restricted so that the cafeteria plan is offering excepted benefit.
C.8a	Indicate whether the Company will contribute to the Plan	If anything other than "No" is selected and the plan offers a Healthcare Reimbursement Account: Warning: if employer contributions are permitted and the plan offers a Healthcare Reimbursement Account (A.11a is "Yes"), you must ensure that employer contributions to the Healthcare Reimbursement Account are limited/restricted so that the Healthcare Reimbursement Account is an excepted benefit.
J.9	... indicate whether the Summary Plan Description should include HIPAA portability language (only applicable if the cafeteria plan offers a Healthcare Reimbursement Account)	If "Yes" is selected: Cafeteria plans should be designed as excepted benefits not subject to HIPAA Portability. Please update J.9 to "No" and ensure the cafeteria plan is offering excepted benefits.

Because of the minimum employer contributions to a Simple Cafeteria plan, it is nearly impossible to draft a simple cafeteria plan as excepted benefits unless the plan limits the employer contributions that can be made to the health FSA or limits the health FSA to reimbursements that are excepted benefits.

In general, no changes are necessary. These plans are cafeteria/Code section 125 plans that provide for pre-tax payment of the employee portion of employer-sponsored group health plans. POPs are not affected by health care reform, nor are they affected by Notice 2013-54 (POPs are not "employer payment plans" as defined in Notice 2013-54).

However, you may need to ensure that all POPs on the system have been designed to only provide for pre-tax payment of the employee portion of employer-sponsored group health plans. POP checklists do offer the option to describe "other" contracts at A.5. Please ensure that POPs using "other" as an option have not been designed to reimburse individual health policy premiums. We have also added a warning to the system to help ensure the "other" option is not used for contributions to reimburse individual health policy premiums in the future.

In the preamble to the proposed rule regarding Shared Responsibility for Employers Regarding Health Coverage, the IRS described transition relief from the election rules under Proposed Treasury Regulation section 1.125-2 with respect to salary reduction elections under a cafeteria plan for an employer-provided accident and health plan with a fiscal year beginning in 2013. Applicable plans may allow participants to make changes to their salary reduction elections under the cafeteria plan to cease salary reduction and purchase coverage through an Exchange. Premium elections would typically cease because premiums for qualified health plans offered through an exchange are not qualified benefits under a cafeteria plan - no pre-tax payment of exchange premiums is permitted. We continue to receive substantial demand for amendment language to add this option. However, because we think there are several unanswered questions regarding this option, we plan to wait until 2014 to release any amendment language.

Please note that the IRS guidance indicates the amendment is not due until December 31, 2014 and can be adopted retroactively. Below, we include the text of the preamble that describes the options available to an applicable large employer.

... an applicable large employer member is permitted, at its election, to amend one or more of its written cafeteria plans to permit either or both of the following changes in salary reduction elections:

(1) An employee who elected to reduce his/her salary through the cafeteria plan for accident and health plan coverage with a fiscal plan year beginning in 2013 is allowed to prospectively revoke or change his or her election with respect to the accident and health plan once, during that plan year, without regard to whether the employee experienced a change in status event described in [treasury regulation] section 1.125-4; and

(2) An employee who failed to make a salary reduction election through his or her employer's cafeteria plan for accident and health plan coverage with a fiscal plan year beginning in 2013 before the deadline in proposed [Treasury Regulation] section 1.125-2 for making elections for the cafeteria plan year beginning in 2013 is allowed to make a prospective salary reduction election for accident and health coverage on or after the first day of the 2013 plan year of the cafeteria plan, without regard to whether the employee experienced a change in status event described in [Treasury Regulation] section 1.125-4.

Before a Plan decides to rely on the guidance above and allows cafeteria plan election changes, please be aware of the following:

• IRS Notice 2013-45 delayed the employer shared responsibility provisions under Code section 4980H (Employer Shared Responsibility Provisions). The notice did not address whether the transition relief from the Cafeteria plan election rules was also delayed (the cafeteria transition rule was included in the preamble to the delayed employer shared responsibility provisions rule).
• The relief provided is quite limited:
  • Only applies to "applicable large employers" (generally, employers with at least 50 full-time employees or equivalents)
  • Only applies to Cafeteria plans with a fiscal year beginning in 2013 (non-calendar year plans)
  • The election changes permitted are only with regard to salary reduction elections for an employer-provided accident and health plan (pre-tax premiums) --- election changes would not be permitted for health FSAs
• The transition relief does not require the employer-provided accident and health plan to dis-enroll the participant (will the plan pursue the participant for unpaid premiums?)
• The employee that wants to leave the employer plan for the exchange should be aware that premium assistance may be limited if the employer-sponsored plan meets minimum value and the premium paid by the employee costs up to 9.5% of the employee's income

Please contact support@ftwilliam.com if you have any questions or if you have any comments regarding this issue.