IRS clarifies application of market reforms to group health care arrangements

The IRS has issued, in question and answer format, supplemental guidance on the application of market reforms to various types of group health care arrangements under the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148). The guidance covers: (a) health reimbursement arrangements (HRAs), including HRAs integrated with a group health plan, and similar employer-funded healthcare arrangements; and (b) reimbursement arrangements described in IRS Revenue Ruling 61-146, and arrangements under which an employer directly pays the premium for an employee’s individual health insurance policy.

In general, the guidance clarifies:

• certain aspects of the employer shared-responsibility provisions under Code Sec. 4980H, including identification of employee contributions when an employer offers an HRA, flex credits, opt-out payments or fringe benefit payments;
• application of the adjusted 9.5-percent affordability threshold under Code Sec. 36B(c)(2)(i)(II) to the safe harbor provisions under Code Sec. 4980H;
• the “employer status” of certain entities for purposes of Code Sec. 4980H;
• application of Code Sec. 4980H to certain government entities;
• the information reporting provisions for applicable large employers under Code Sec. 6056;
• application of the health savings account rules to individuals eligible for VA benefits; and
• application of COBRA continuation coverage rules to health flexible spending account (FSA) carryover amounts and conditions that may be put on the use of such amounts.

HRAs. More specifically, the IRS is stating that a retiree-only HRA (one that covers fewer than two current-employee participants), with available amounts as determined by amounts credited for the period an individual was a current employee with an HRA integrated with another group health plan, is an eligible employer-sponsored plan for any month during which funds are retained in the HRA, even after the employer has ceased making contributions. Therefore, this HRA participant will not be eligible for a premium tax credit while the HRA has available funds. The IRS is also stating that a current-employee HRA fails to be integrated with another group health plan if the amounts credited to the HRA may be used to purchase individual market coverage.

The IRS continues that, whether or not an HRA is integrated with other group health plan coverage, unused amounts credited before January 1, 2014, including any amounts credited before January 1, 2013 and any amounts that were credited during 2013 under the terms of an HRA 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 the annual dollar limit prohibition or the preventive services requirements.

The IRS states that it is aware that many HRAs do not currently contain the restriction necessary to integrate an HRA with employee-only coverage under an employer’s other group health plan because the HRA is intended to reimburse only limited expenses such as co-pays and employees have been permitted to use them for these types of expenses of other family members regardless of whether those family members were also enrolled in the employer’s other group health plan. Therefore, the IRS is facilitating the transition to compliance with group market reforms through the use of integrated HRAs by not treating an HRA available for the expenses of family members not enrolled in the employer’s other group health plan for plan years beginning before January 1, 2016, as failing to be integrated with an employer’s other group health plan for plan years beginning before January 1, 2016. Nor will the IRS treat an HRA and group health plan that otherwise would be integrated based on the terms of the plan as of December 16, 2015 as failing to be integrated with an employer’s other group health plan for plan years beginning before January 1, 2017, solely because the HRA covers expenses of one or more of an employee’s family members, even if those family members are not also enrolled in the employer’s other group health plan. However, to be integrated with the employer’s group health plan, the HRA must meet all the other requirements of the applicable guidance on integration with a group health plan.

Cafeteria plans. The IRS reminds practitioners that an employer arrangement reimbursing the cost of individual market coverage, offered under a cafeteria plan, is an employer payment plan, which is a group health plan for purposes of ACA market reforms, and, as such, cannot be integrated with the individual market coverage purchased through that employer payment plan. It will, therefore, fail to satisfy market reforms.

The IRS also explains that the affordability of an employer’s offer of eligible employer-sponsored coverage for purposes ofCode Sec. 36B, Code Sec. 5000A, and Code Sec. 4980H depends on whether the employee’s required contribution exceeds the applicable required contribution percentage of household income. An employee’s required contribution is the portion of the annual premium that the employee must pay for self-only coverage. Under a cafeteria plan, an employee’s enrollment in a group health plan is usually funded by salary reduction but may also be funded by employer flex contributions. Whether the latter reduce the amount of an employee’s required contribution depends on the nature of the available flex contribution, so the amount of the employer contribution reduces the employee’s required contribution if the amount constitutes a “health flex contribution” under Reg. §1.5000A-3(e)(3)(ii)(E) and Reg. §1.36B-2(c)(3)(v)(A)(6). An employer flex contribution that is not a health flex contribution is not considered to reduce an employee’s required contribution. Also, an employer flex contribution that is available to pay for health care but also could be received as cash is not a health flex contribution and does not reduce the employee’s required contribution.

The IRS intends to issue proposed regulations reflecting its determination that it is generally appropriate to treat an unconditional opt-out arrangement in the same manner as a salary reduction for purposes of determining an employee’s required contribution under Code Sec. 36B, Code Sec. 5000A and Code Sec. 4980H(b ). An unconditional opt-out arrangement is one providing for a payment conditioned solely on an employee declining coverage under an employer’s health plan and not on an employee satisfying any meaningful requirement related to the provision of health care to employees, such as a requirement to provide proof of coverage provided by a spouse’s employer.

Hours of service. The IRS is also clarifying certain discrepancies between Labor Department and IRS regulations with regard to the definition of hours of service. First, the IRS states that an hour of service for purposes of Code Sec. 4980H does not include any hours after an individual terminates employment. Second, an hour or service does not include either an hour for which an employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workmen’s compensation, or unemployment or disability insurance laws. Third, an hour of service does not include an hour of service for a payment which solely reimburses an employee for medical or medically related expenses incurred by the employee. The IRS adds that there is no 501-hour limit on the hours of service required to be credited to an employee on account of any single continuous period during which the employee performs no duties if the hours of service would otherwise qualify as hours of service. For purposes of determining whether an hour of service must be credited, a payment is deemed to be made by or due from an employer regardless of whether the payment is made by or due from the employer directly or indirectly through such entities as a trust fund or insurer to which the employer contributes or pays premiums. This is regardless of whether contributions made or due to the entity are for the benefit of particular employees or are on behalf of a group of employees in the aggregate.

As such, periods during which an individual is not performing services but is receiving payments due to short-term disability or long-term disability result in hours of service for any part of the period during which the recipient retains status as an employee of the employer. This is unless payments are made from an arrangement to which the employer did not contribute directly or indirectly. Therefore, a disability arrangement for which the employee paid with after-tax contributions would be treated as an arrangement to which the employer did not contribute, and payments from the arrangement would not give rise to hours of service.

COBRA and health FSAs. The IRS also clarifies previously-issued COBRA guidance found in IRS Notice 2013-71, which modified the rules for cafeteria plans to allow a carryover of up to $500 of unused funds remaining in a health flexible spending account (health FSA) at the end of a plan year. A health FSA does not have to make COBRA continuation coverage available for the plan year in which a qualifying event occurs unless, as of the date of the qualifying event, the amount the COBRA beneficiary may become entitled to during the remainder of the plan year exceeds the amount the health FSA may require to be paid for COBRA continuation coverage for the remainder of the plan year. The IRS now adds that any carryover amount as permitted by IRS Notice 2013-71 is included in determining the amount of a benefit that a COBRA beneficiary is entitled to receive during the remainder of the plan year in which a qualifying event occurs.

The IRS is also stating that the maximum amount that a health FSA may require to be paid for COBRA continuation coverage does not include unused amounts carried over from prior years. COBRA continuation coverage is 102 percent of the applicable premium, and this is based solely on the sum of the employee’s salary reduction for the year and any nonelective employer contribution.
The IRS adds that a health FSA must allow carryovers of unused amounts by similarly situated COBRA benefits if it allows carryovers for similarly situated nonCOBRA beneficiaries, subject to the same terms applicable to the nonCOBRA beneficiaries. The carryover is limited to the applicable COBRA continuation period. The health FSA is not required, however, to allow a COBRA beneficiary to elect additional salary reduction amounts for the carryover period, or to have access to any employer contributions to the health FSA made during the carryover period.

The IRS provides that, subject to the $500 limit, a health FSA may limit the availability of the carryover of unused amounts to individuals who have elected to participate in the health FSA in the next year. This is even if the ability to participate in that next year requires a minimum salary reduction election to the health FSA for that next year. The health FSA may also limit the ability to carry over unused amounts to a maximum period, such as one year.

Finally, the guidance addresses penalty relief under Code Sec. 6721 and Code Sec. 6722 for employers that make a good faith effort to comply with the information reporting requirement under Code Sec. 6056. Notice 2013-54, I.R.B. 2013-40, 287; Notice 2015-17, I.R.B. 2015-14, 845; and T.D. 9744 are supplemented.

SOURCE: IRS Notice 2015-87.

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