The IRS’ Position on HRAs: How the Affordable Care Act and HRAs interact

Thursday, May 5, 2016 - 13:51

The notice provides welcome guidance relating to HRAs that are an integral part of many employers’ group health programs.

The latest installment of guidance from the Internal Revenue Service (IRS) relating to employer-sponsored health plans was issued on December 16, 2015, in the form of IRS Notice 2015-87. The notice provides additional guidance and clarification on the application of the market reform requirements of the Affordable Care Act (ACA) to employer-sponsored health reimbursement accounts (HRAs). The notice represents the latest in a series of IRS pronouncements relating to the interaction between ACA and so-called “employer payment plans,” which include HRAs.

Previously, the IRS stated that it considers any arrangement pursuant to which an employer reimburses employees for medical-related expenses to be a group health plan subject to ACA’s market reforms. Unfortunately, these arrangements are unable to satisfy the ACA requirements (such as the prohibition on annual or lifetime limits) on a stand-alone basis and must, therefore, be “integrated” with an ACA-compliant group health plan (but not an individual market plan). This is true with respect to both pre-tax and after-tax reimbursement arrangements as well as to the direct or indirect reimbursement of any medical-related costs, including insurance premiums.

The notice provides new guidance and/or clarification regarding the following HRA issues:

Retiree Purchase of Individual Market Coverage

In Q&A 1, the notice reaffirms previous IRS guidance providing that an HRA covering fewer than two participants who are current employees is not subject to ACA’s market reforms. Accordingly, a retiree-only HRA may be used to purchase individual market coverage without causing the HRA to fail to comply with ACA’s market reforms. This is true even if the amounts available to the HRA participants are determined in whole or in part by amounts credited during the period in which the individual participated in an integrated HRA covering active employees. It is important to note, however, that the retiree-only HRA will constitute an eligible employer-sponsored plan for any month during which the funds are retained by the HRA, thereby resulting in a participant in the HRA with available funds for any month not being eligible for a premium tax credit with respect to the purchase of marketplace coverage for that month.

Employee Purchase of Individual Market Coverage

The IRS reiterates its position that current employees may not use an HRA to purchase individual market coverage. Q&A 2 further clarifies this position by providing that even though amounts that were credited to an HRA covering an active employee while the HRA was integrated with another group health plan generally may be used to reimburse medical expenses in accordance with the terms of the HRA after the employee ceases to be covered by the other integrated group health plan, these credited amounts may not be used to purchase individual coverage after the employee ceases to be covered by the other integrated group health plan. In short, an HRA covering active employees may not permit the purchase of individual market coverage, even with respect to unused amounts credited to the employee while the HRA was integrated with another group health plan.

Transition Relief

Q&A 3 clarifies the 2013 FAQ Guidance issued on January 24, 2013, by providing that HRAs may reimburse medical expenses without violating ACA’s market reforms if the amounts were credited before January 1, 2013, or the amounts were credited during 2013 under the terms of an HRA in effect on January 1, 2013. If the HRA in effect on January 1, 2013, did not set the amounts to be credited during 2013 or the timing of the credits, the amounts credited during 2013 cannot exceed the amounts credited during 2012 and may not be credited earlier or faster than the crediting schedule or rate that applied during 2012.

Reimbursing Excepted Benefits

In Q&A 5, the IRS clarifies that an HRA may reimburse individual coverage that is restricted to excepted benefits only. Such benefits usually include stand-alone dental and/or vision coverage. The IRS is clear to point out, however, that the terms of the HRA must specifically limit reimbursement to excepted benefits. If the terms of an HRA do not limit premium payments for individual market coverage to excepted benefits, the HRA will fail to comply with the ACA market reforms notwithstanding the fact that a covered employee is reimbursed only for excepted benefits.

Reimbursing Spouse or Dependent Expenses

Q&A 4 contains what is likely the most surprising IRS position with respect to HRAs. Specifically, the IRS stated that an HRA is permitted to be integrated with the employer’s other group health plan for ACA market-reform-compliance purposes only for the individuals who are enrolled in both the HRA and the employer’s other group health plan. Accordingly, if a spouse and/or dependent is not enrolled in the employer’s other group health plan, the HRA will fail to be ACA-compliant if funds in the HRA are utilized to reimburse that person’s medical expenses. Under a transitional rule, however, the IRS will not treat an HRA and a group health plan that would otherwise be integrated based on the terms of the plan in effect on December 15, 2015, as failing to be integrated for plan years beginning before January 1, 2017, solely because the HRA covers the expenses of a spouse and/or dependent who is not enrolled in the employer’s other group health plan.

This IRS position is curious since the final regulations, issued on November 18, 2015, specifically provide that an HRA will be considered to be integrated with another group health plan if the employee is “actually enrolled in a group health plan ... that does not consist solely of excepted benefits, regardless of whether the plan is offered by the same plan
sponsor.” In addition, IRS Notice 2013-54 contemplates that an employee’s HRA could be integrated with a group health plan sponsored by his or his spouse’s employer. In light of these conflicting sources of guidance and the transitional rule that will render the position stated in Q&A 4 ineffective until 2017, there is ample time for the IRS to clarify its position.

Impact on ACA Affordability

Pursuant to Q&A 7, amounts made available for the current plan year under an HRA that an employee may use to pay premiums for an eligible employer-sponsored plan are counted toward the employee’s required contribution for ACA affordability purposes provided the HRA is integrated (as defined in IRS Notice 2013-54 and in subsequent published guidance) with the eligible employer-sponsored plan. Employer contributions to an HRA count toward the employee’s required contribution only to the extent that the amount of the employer’s annual contribution is required under the terms of the HRA or otherwise determinable within reasonable time before the employee must decide whether to enroll in the eligible employer-sponsored plan. The contribution that meets this requirement relates to the immediately subsequent period of coverage for which the employee could enroll and use the HRA contribution. The employer contribution to an HRA (and any resulting reduction in the employee contribution) is treated as made ratably for each month of the period to which it relates. It is important to note that the employer contribution counts toward the employee’s required contribution whether or not the employee actually uses the employer contribution to fund all or a portion of the employer-sponsored plan’s premium.

The notice provides welcome guidance relating to HRAs that are an integral part of many employers’ group health programs. With the exception of the treatment of expense reimbursements incurred by spouses and dependents enrolled in another employer-sponsored health plan, the guidance in the notice is consistent with previous IRS pronouncements. Employers should review their HRA plan documents and make timely revisions, as needed, to comply with the guidance in the notice.