Q&A: New Guidance on Defined Contribution Health Arrangements

The following questions and answers were originally prepared by Crowell & Moring, LLP on behalf of the American Benefits Council, to highlight some of the more significant aspects of IRS Notice 2013-54 and Department of Labor Technical Release 2013-03 (the “New Guidance”) for employers and plan administrators. Our detailed analysis of the New Guidance follows below.

Q1: Can an employer sponsor a stand-alone HRA for its active employees?

A1: No. The New Guidance reiterates past guidance from the Agencies in providing that an employer cannot sponsor an HRA for its active employees, unless the HRA is “integrated” with an underlying major medical plan that does not consist solely of what are called HIPAA-excepted benefits. (HIPAA-excepted benefits are certain categories of benefits that are not subject to HIPAA’s portability requirements– for example, dental or vision benefits that are offered under a separate insurance policy or contract, or are not considered an “integral part of the plan” under law.) Thus, an HRA must be only available to employees who are enrolled in qualifying employer-sponsored major medical coverage- otherwise, it will violate PPACA’s market reforms.

Q2: Can an employer sponsor a stand-alone HRA for its retirees?

A2: Yes, so long as the stand-alone HRA is offered as a retiree-only plan. Per prior Agency guidance, plans that cover only retirees are not subject to PPACA’s market reforms. Thus, an employer may offer a stand-alone HRA to its retirees as part of a retiree-only plan. Employers should keep in mind that the HRA will constitute “minimum essential coverage” under PPACA. Such an arrangement will allow retirees who have not yet reached age 65 to use the coverage to satisfy the individual mandate under PPACA, but those retirees will not be eligible to receive any federal premium subsidies (and cost-sharing reductions) if they purchase individual insurance on the Exchanges.

Q3: Can an employer allow employees to pay for individual insurance purchased from a state or federally-facilitated Exchange on a pre-tax basis through the employer’s cafeteria plan?

A3: No. PPACA, as well as the New Guidance, makes clear that an employee cannot pay for Exchange-based individual insurance through an employer’s Internal Revenue Code (Code) Section 125 cafeteria plan.

Q4: Can an employer allow employees to utilize a cafeteria plan to pay on a pre-tax basis for individual insurance purchased outside of a state or federally-facilitated Exchange?

A4: It is not entirely clear, but we believe there may be a good argument it can. As noted above, the New Guidance makes clear that an employee cannot access an employer’s cafeteria plan to pay for Exchange-based individual insurance. What is less clear is whether an employee may be permitted to pay on a pre-tax basis through a cafeteria plan for individual insurance purchased outside of an Exchange. The basis for the uncertainty stems from the New Guidance which, as discussed below, precludes the use of arrangements called “employer payment plans.” While we hope that the Agencies will clarify that these type of arrangements do not include cafeteria plans if used by employees to pay for individual insurance purchased outside of an Exchange, we understand the Agencies are considering this issue.

Q5: Can an employer pay on a tax-favored basis (either directly or through reimbursement) for some or all of an employee’s cost of individual insurance where purchased from an Exchange? Or outside an Exchange?

A5: Based on the New Guidance, the answer appears to be “no.” As noted above, the New Guidance confirms that stand-alone HRAs are not permitted. Thus, HRAs, which up until now have been a commonly-used tax-advantaged vehicle for reimbursing an employee’s costs for qualified medical expenses (including medical insurance premiums) generally can no longer be used for this purpose.

Additionally, the New Guidance provides that “employer payment plans” also may not be utilized. The New Guidance defines an employer payment plan to be a group health plan 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.

In light of the New Guidance, it appears that an employer may not pay for an employee’s individual insurance on a tax-favored basis – whether through direct payment or subsidy or through reimbursing an employee for his or her incurred individual insurance premium costs.

Q6: If an employer sponsors “minimum value” health coverage for its employees, what does it need to do to ensure that its HRAs are integrated with group health coverage in order to meet the PPACA requirements?

A6: An employer can use one of two tests to determine if an HRA is properly integrated with group health coverage that provides “minimum value.” The first test can only be used if the group health coverage provides “minimum value,” and the following criteria must be satisfied:

• The employer must offer a group health plan to the employee that provides minimum value;
• The employee receiving the HRA must actually be enrolled in group health plan coverage that provides minimum value;
• The HRA must be available only to employees who are enrolled in minimum value group health plan coverage; and
• Under the terms of the HRA, the employee must be permitted, on an annual basis, to permanently opt out of and waive future reimbursements. In addition, upon termination, the employee must be permitted to permanently opt out of and waive future reimbursements, or all amounts in the HRA must be forfeited.

Alternatively, the arrangement can meet the requirements of the New Guidance if it satisfies the criteria described in the following Q&A (which can also be used for group health coverage that does not provide “minimum value”).

Q7: If an employer sponsors major medical coverage for its employees, but it is not provide corresponding “minimum value” coverage, what does it need to do to ensure that its HRAs are integrated with group health coverage in order to meet the PPACA requirements?

A7: In order for the coverage that does not provide minimum value to be deemed integrated under the New Guidance, the following criteria must be satisfied:

• The employer must offer a group health plan to the employee that cannot consist solely of excepted benefits;
• The employee receiving the HRA must actually be enrolled in group health plan coverage that does not consist solely of excepted benefits. Note that the employee does not have to be enrolled in the employer’s plan; for example, the employee could be enrolled in a group health plan maintained by the employer of the employee’s spouse;
• The HRA must be available only to employees enrolled in non-HRA group coverage;
• The HRA is limited to one or more of the following categories of items for reimbursement: co-payments, co-insurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care that does not constitute essential health benefits; and
• Under the terms of the HRA, the employee must be permitted, on an annual basis, to permanently opt out of and waive future reimbursements. In addition, upon termination, the employee must be permitted to permanently opt out of and waive future reimbursements, or all amounts in the HRA must be forfeited.

Q8: Can an employer have an HRA that is integrated with coverage consisting solely of HIPAA-excepted benefits?

A8. It is not entirely clear at this time. Under the New Guidance, an HRA generally cannot be integrated with a group health plan that provides only HIPAA-excepted benefits under the integration tests set forth above. However, some employers have considered establishing HRAs that would, by their terms, be able to only reimburse claims related to HIPAA-excepted benefits, and provide those HRAs in conjunction with a group health plan that only covers HIPAA-excepted benefits. It is not clear whether this arrangement would be considered HIPAA-excepted by the Agencies and therefore not subject to the market reforms. We expect further guidance may be forthcoming on this issue.

Q9: What happens if an employer offers a stand-alone HRA – or an HRA that is not sufficiently integrated with qualifying major medical coverage?

A9: Depending on its specific terms, the HRA would be in violation of PPACA’s market reforms, including possibly the prohibitions on the use of annual and lifetime dollar limits on essential health benefits (EHBs) and the requirement to provide “first-dollar” preventive care benefits. The penalties for violating each market reform are generally $100 per day, per affected individual.

One other thing to keep in mind is that the HRA will qualify as “minimum essential coverage” for any individual who enjoys coverage under the HRA. As such, the individual will be deemed to have satisfied his individual mandate obligation under the Code by reason of the HRA coverage (at least for any month in which he has such coverage). However, the individual (including an employee’s spouse and/or dependents who indirectly enjoy coverage via the employee’s HRA) will be ineligible for any federal subsidies offered through the Exchange (including premium tax credits and cost-sharing reductions). The HRA coverage may also limit an individual’s ability to enroll in Exchange-based coverage more generally. 

Q10: What rules apply to non-integrated HRAs with existing account balances?

A10: The Agencies had previously signaled in guidance that they would be providing special rules for HRAs with respect to account balances existing as of January 1, 2014. Unfortunately, the New Guidance does not include such rules. Moreover, such rules, if issued, would appear to only extend to amounts credited under the terms of an HRA in effect as of January 1, 2013. In the absence of special transition rules, it appears that if existing account balances in non-integrated HRAs are available to employees next year, those HRAs could be found to violate the Act’s market reforms (see above), which could result in material financial penalties accruing to the employer plan sponsor. Additionally, these HRAs would seem to constitute “minimum essential coverage” for any individual covered under the HRA (including an employee’s spouse and/or dependents who indirectly enjoy coverage via the employee’s HRA).

We understand the Agencies are considering issuing additional guidance regarding the treatment of such existing account balances.

Q11: Can an employer continue to sponsor a stand-alone health FSA for its employees?

A11. Yes, so long as the health FSA qualifies as HIPAA-excepted. A health FSA is considered to provide only excepted benefits if other group health plan coverage not limited to excepted benefits is made available for the year to employees by the employer, and the FSA is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the arrangement for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election).

Q12: An employer sponsors an employee assistance program (EAP) for its employees. Can the EAP satisfy the individual mandate for those employees? Can participating in the EAP disqualify an employee from eligibility for federal premium subsidies related to the purchase of Exchange-based individual insurance?

A12: Maybe. The New Guidance provides that benefits under an EAP will be considered HIPAA-excepted benefits, and thus not minimum essential coverage and not subject to the market reforms, if the EAP does not provide significant benefits in the nature of medical care or treatment. Thus, an EAP that is deemed to not provide significant benefits in the nature of medical care or treatment will not constitute minimum essential coverage, and therefore being covered by such an EAP would not satisfy the individual mandate, nor preclude an employee from being eligible for premium subsidies on an Exchange. At least through 2014, employers may use a reasonable, good faith interpretation of whether an EAP provides “significant benefits in the nature of medical care or treatment.”

Click here to read an article also prepared by Crowell & Moring, LLP on behalf of the American Benefits Council, that provides additional analysis regarding the New Guidance.