Agencies Issue Guidance On Application Of ACA’s Market Reforms To Employer Health Care Arrangements

The Employee Benefits Security Administration (EBSA) has issued guidance, in the form of Technical Release 2013-03, on the application of two of the Patient Protection and Affordable Care Act’s (ACA) market reform provisions to certain employer health care arrangements. The Treasury Department simultaneously issued guidance in substantially identical form (IRS Notice 2013-54) as the Technical Release, and the Department of Health and Human Services (HHS) also issued guidance to reflect that HHS concurs in the application of the laws under its jurisdiction as set forth in the Technical Release.

The Technical Release applies for plan years beginning on and after Jan. 1, 2014, but the guidance may be applied for all prior periods. If legislative action by any state, local, or Indian tribal government entity is necessary to modify the terms of certain arrangements affected by the guidance, the applicability date of the portions of the Technical Release under which such arrangements would otherwise fail to comply with the market reforms is extended to the later of Jan. 1, 2014, or the first day of the first plan year following the first close of a regular legislative session of the applicable legislative body after Sept. 13, 2013.

Arrangements affected. The guidance addresses the following types of arrangements:

• health reimbursement arrangements (HRAs);

• group health plans under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy, or arrangements under which the employer uses its funds to directly pay the premium for an individual health insurance policy covering the employee (collectively, an employer payment plan); and

• certain health flexible spending arrangements (health FSAs).

The EBSA also provided guidance on Sec. 125(f)(3) (definition of qualified benefit as it applies to an exchange-participating qualified health plan) and on employee assistance programs (EAPs).

Market reforms. The ACA contains certain market reforms that apply to group health plans (the market reforms).The market reforms specifically addressed in the guidance are:

1) PHSA Sec. 2711 which provides that a group health plan (or a health insurance issuer offering group health insurance coverage) may not establish any annual limit on the dollar amount of essential health benefits for any individual (the annual dollar limit prohibition); and

2) PHSA Sec. 2713 which requires non-grandfathered group health plans (or health insurance issuers offering group health insurance plans) to provide certain preventive services without imposing any cost-sharing requirements for these services (the preventive services requirements).

Application to HRAs, certain other arrangements. On Jan. 24, 2013, the Treasury Department, HHS, and Department of Labor (Departments) issued FAQs that address the application of the annual dollar limit prohibition to certain HRAs (HRA FAQs). The HRA FAQs provide that an employer-sponsored HRA cannot be integrated with individual market coverage, and, therefore, an HRA used to purchase coverage on the individual market will fail to comply with the annual dollar limit prohibition. The Technical Release clarifies that other types of group health plans used to purchase coverage on the individual market may not be integrated with that individual market coverage for purposes of the annual dollar limit prohibition.

The Technical Release also provides that an HRA that is integrated with a group health plan will comply with the preventive services requirements if the group health plan with which the HRA is integrated complies with the preventive services requirements. A group health plan, including an HRA, used to purchase coverage on the individual market is not integrated with that individual market coverage for purposes of the preventive services requirements, however.

An HRA will be integrated with a group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements if it meets the requirements under either of the integration methods described below. Pursuant to the Technical Release, under both methods, integration does not require that the HRA and the coverage with which it is integrated share the same plan sponsor, the same plan document or governing instruments, or file a single Form 5500, if applicable.

Integration methods. The EBSA provides two integration methods for HRAs, one that does not require minimum value (MV) and one that does.

Minimum value not required. An HRA is integrated with another group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements if:

1. the employer offers a group health plan (other than the HRA) to the employee that does not consist solely of excepted benefits;

2. the employee receiving the HRA is actually enrolled in a group health plan (other than the HRA) that does not consist solely of excepted benefits, regardless of whether the employer sponsors the plan (non-HRA group coverage);

3. the HRA is available only to employees who are enrolled in non-HRA group coverage, regardless of whether the employer sponsors the non-HRA group coverage (for example, the HRA may be offered only to employees who do not enroll in the employer’s group health plan but are enrolled in other non-HRA group coverage, such as a plan maintained by the employer of the employee’s spouse);

4. the HRA is limited to reimbursement of one or more of the following—copayments, co-insurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care (as defined under Code Sec. 213(d)) that does not constitute essential health benefits; and

5. under the terms of the HRA, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA at least annually and, upon termination of employment, either the remaining amounts in the HRA are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA. This opt-out feature is required because the benefits provided by the HRA generally will constitute minimum essential coverage under Code Sec. 5000A and will therefore preclude the individual from claiming a Code Sec. 36B premium tax credit.

Minimum value required. Alternatively, an HRA that is not limited with respect to reimbursements as required under the integration method discussed above is integrated with a group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements if:

1. the employer offers a group health plan to the employee that provides MV;

2. the employee receiving the HRA is actually enrolled in a group health plan that provides MV, regardless of whether the employer sponsors the plan (non-HRA MV group coverage);

3. the HRA is available only to employees who are actually enrolled in non-HRA MV group coverage, regardless of whether the employer sponsors the non-HRA MV group coverage (for example, the HRA may be offered only to employees who do not enroll in the employer’s group health plan but are enrolled in other non-HRA MV group coverage, such as a plan maintained by an employer of the employee’s spouse); and

4. under the terms of the HRA, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA at least annually, and, upon termination of employment, either the remaining amounts in the HRA are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA.

Unused amounts credited to an HRA. The Technical Release explains that whether or not an HRA is integrated with other group health plan coverage, unused amounts that were credited to an HRA while the 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 an employee ceases to be covered by other integrated group health plan coverage without causing the HRA to fail to comply with the market reforms.

Essential health benefits. In general, an HRA integrated with a group health plan imposes an annual limit in violation of the annual dollar limit prohibition if the group health plan with which the HRA is integrated does not cover a category of essential health benefits and the HRA is available to cover that category of essential health benefits and limits the coverage to the HRA’s maximum benefit. According to the Technical Release, this situation should not arise for a group health plan funded through non-grandfathered health insurance coverage in the small group market, as small group market plans must cover all categories of essential health benefits, with the exception of pediatric dental benefits, if pediatric dental benefits are available through a stand-alone dental plan.

Note that under the integration method available for plans that provide MV, if a group health plan provides MV, an HRA integrated with that group health plan will not be treated as imposing an annual limit in violation of the annual dollar limit prohibition, even if that group health plan does not cover a category of essential health benefits and the HRA is available to cover that category of essential health benefits and limits the coverage to the HRA’s maximum benefit.

Application to certain health FSAs. The guidance also explains that the market reforms do not apply to a group health plan in relation to its provision of benefits that are excepted benefits. Health FSAs are group health plans but will be considered to provide only excepted benefits 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 two times the participant’s salary reduction election for the health FSA for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election). Therefore, a health FSA that is considered to provide only excepted benefits is not subject to the market reforms.

If an employer provides a health FSA that does not qualify as excepted benefits, the health FSA generally is subject to the market reforms, including the preventive services requirements. Because a health FSA that is not excepted benefits is not integrated with a group health plan, it will fail to meet the preventive services requirements.

Exemption for FSAs. Interim final regulations regarding the annual dollar limit prohibition contain an exemption for health FSAs. This exemption does not apply to a health FSA that is not offered through a Sec.125 plan, however, according to the guidance.

The Technical Release explains that the departments intended for this exemption from the annual dollar limit prohibition to apply only to a health FSA that is offered through a Sec. 125 plan and thus subject to a separate annual limitation under Sec.125(i). There is no similar limitation on a health FSA that is not part of a Sec. 125 plan, and thus no basis to imply that it is not subject to the annual dollar limit prohibition.

To clarify this issue, the Departments intend to amend the annual dollar limit prohibition regulations to conform to this guidance retroactively applicable as of Sept. 13, 2013. As a result, a health FSA that is not offered through a Sec. 125 plan is subject to the annual dollar limit prohibition and will fail to comply with the annual dollar limit prohibition.

Guidance on EAPs. The Technical Release explains that the Departments intend to amend certain regulations to provide that benefits under an employee assistance program (EAP) are considered to be excepted benefits, but only if the program does not provide significant benefits in the nature of medical care or treatment.

Excepted benefits are not subject to the market reforms and are not minimum essential coverage under Code Sec. 5000A. Until rulemaking is finalized, through at least 2014, the Departments will consider an EAP to constitute excepted benefits only if the EAP does not provide significant benefits 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.

IRS-related guidance on HRAs, cafeteria plans. Guidance in the Technical Release that relates to issues under the sole jurisdiction of the IRS explains that an HRA that has fewer than two participants who are current employees on the first day of the plan year (for example, a retiree-only HRA) is minimum essential coverage.

The Technical Release notes that some employers are considering making amounts available under stand-alone retiree-only HRAs to retired employees so that the employer would be able to reimburse medical expenses, including the purchase of an individual health insurance policy. For this purpose, the stand-alone HRA would constitute an eligible employer-sponsored plan under Code Sec. 5000A(f)(2), and therefore the coverage would constitute minimum essential coverage under Code Sec. 5000A, for a 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). As a result, a retiree covered by a stand-alone HRA for any month will not be eligible for a premium tax credit for that month. Note that unlike other HRAs, the market reforms generally do not apply to a retiree-only HRA and therefore would not impact an employer’s choice to offer a retiree-only HRA.

Amounts newly made available under an HRA. Additional IRS-related guidance in the Technical Release provides that if an employer offers an employee both a primary eligible employer-sponsored plan and an HRA that would be integrated with the primary plan if the employee enrolled in the plan, amounts newly made available for the current plan year under the HRA may be considered in determining whether the arrangement satisfies either the affordability requirement or the MV requirement, but not both.

Amounts newly made available for the current plan year under the HRA that an employee may use only to reduce cost-sharing for covered medical expenses under the primary employer-sponsored plan count only toward the MV requirement. Amounts newly made available for the current plan year under the HRA that an employee may use to pay premiums or to pay both premiums and cost-sharing under the primary employer-sponsored plan count only toward the affordability requirement.

Qualified benefit under a cafeteria plan. The Technical Release explains that Sec. 125(f)(3), effective for taxable years beginning after Dec. 31, 2013, provides that the term “qualified benefit” does not include any qualified health plan (QHP) offered through an Exchange. This prohibits an employer from providing a QHP offered through an Exchange as a benefit under the employer’s Sec. 125 plan. Some states have already established Exchanges and employers in those states may have Sec. 125 plan provisions that allow employees to enroll in health coverage through the Exchange as a benefit under a Sec. 125 plan.

For Sec. 125 plans that as of Sept. 13, 2013, operate on a plan year other than a calendar year, the restriction under Sec. 125(f)(3) will not apply before the first plan year of the Sec.125 plan that begins after Dec. 31, 2013. Thus, for the remainder of a plan year beginning in 2013, a QHP provided through an Exchange as a benefit under a Sec. 125 plan will not result in all benefits provided under the Sec. 125 plan being taxable. However, individuals may not claim a premium tax credit for any month in which the individual was covered by a QHP provided through an Exchange as a benefit under a Sec. 125 plan.

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