On September 13, 2013, the Internal Revenue Service (IRS) and Department of Labor (DOL) issued nearly identical guidance, and the Department of Health and Human Services (HHS) issued a memo on September 16, 2013, concurring with the guidance, which is specific to changes made under the Affordable Care Act (ACA) to Health Reimbursement Arrangements (HRAs) and individual health coverage. In addition, guidance also extends some unexpected changes to benefits under Code Section 125 cafeteria plans. All this is outlined in IRS Notice 2013-54 and DOL Technical Release 2013-3. This guidance created quite a stir in the benefits community as experts tried to figure out the far-reaching effects it had beyond just the guidance as written. The IRS further issued Notice 2013-71 on October 31, 2013, which made modifications to the “use it or lose it” rule for health flexible spending arrangements in Code Section 125 cafeteria plans.
So what happened?
- There was guidance clarifying what kind of HRAs could stay in existence starting January 1, 2014, considering the annual limit prohibition and preventive services mandate of the ACA. (See Wipfli Alerts & Updates: Health Reimbursement Arrangements and the Prohibition on Annual Limits, dated June 26, 2013, for background on the ACA requirements.)
- There was a significant limitation placed on the ability of an employer to pay for an employee’s individual health coverage on a pretax basis (as compared to employer group coverage).
- There was a limitation placed on certain health flexible spending accounts (FSAs) offered inside a cafeteria plan.
- Employers now have the option to allow employees participating in a health FSA to carry over up to $500 of unused amounts remaining in their accounts at the end of a plan year and use it to meet the following year’s medical expense reimbursement needs.
Health Reimbursement Arrangements
The Wipfli Alerts & Updates communication released in June detailed the technical reasons the ACA placed limitations on the employer’s ability to use an HRA after 2013. The recent guidance provides an explanation of the types of HRAs that can remain in existence:
Integrated HRAs – Most HRAs reimburse employees for eligible medical expenses [as described in IRC Section 213(d)] and can continue after 2013 if those eligible for the employer’s HRA are enrolled in the employer’s group health plan or the employee’s spouse’s group health plan. Common arrangements of this type provide HRA benefits to employees who take the employer health insurance, and the HRA benefits are used to reimburse employees for medical expenses prior to meeting the deductible under the group health plan. The guidance is clear that an HRA cannot be considered integrated with an individual policy, so these plan designs that reimburse employees for individual health insurance premiums will be prohibited. There are also variations on what is permitted for the plan design with an integrated HRA, including offering group health plans that may or may not provide minimum value, but the options are complicated and detailed and should be worked out with your benefit provider or consultant.
Retiree-only HRAs – An HRA that covers only retirees is not subject to the ACA and can continue in existence. Many employers provide retirees with an annual amount to be used to pay medical expenses or individual insurance premiums. These can continue as a tax-free benefit and can be used to pay individual premiums. The retirees receiving these benefits are not eligible for premium tax credits if they obtain individual insurance from one of the state Marketplaces. Also, retirees must be given the ability to opt out of the HRA so that they could then be eligible for premium tax credits (so a plan amendment may be needed to comply).
HRAs that cover only HIPAA-excepted benefits – An HRA that provides reimbursement for medical expense can continue if the arrangement meets the definition of a HIPAA-excepted benefit, which means it reimburses only for benefits that are HIPAA-excepted benefits themselves, or it meets a limitation on the expenses reimbursed. Arrangements include:
- Reimbursement of only limited-scope dental or vision expenses.
- Reimbursement of premiums for specified disease, hospital indemnity, and supplemental benefits.
- Employer reimbursement not exceeding $500 (more on this below under health FSA provisions).
“Wasting” standalone HRAs – There are transition rules that allow an employer to stop contributing to its existing HRA and set rules for employees to spend down existing HRA balances. Employers are not forced to terminate reimbursements after 2013.
NOTE: An employee’s continued participation in an HRA is considered minimum essential health benefits and thus makes the employee ineligible for premium subsidies on the state Marketplaces. For that reason, HRAs must be amended to allow employees to opt out of the HRA so they can purchase subsidized marketplace coverage if they desire.
Code Section 125 Cafeteria Plans
Individual Policies – Employers can no longer reimburse employees for premiums on individual health insurance policies, whether the individual purchases his or her own individual policy on the open market or through the Marketplace. This takes away the ability to reimburse for individual premiums through an HRA, as discussed in the limitations on HRAs above. Most significantly, this also takes away the ability to offer pretax payment of individual health insurance premiums through a cafeteria plan. The cafeteria plan rules still permit this, but the ACA mandates, in general, have taken away this ability. Cafeteria plans can still permit pretax payments for individual policies for HIPAA-excepted coverage—limited-scope dental and vision, hospital indemnity, cancer, and other voluntary benefits, other than individual health insurance.
Health Flexible Spending Arrangements (FSAs) – Health FSAs within a cafeteria plan will now fail to meet the preventive services mandate under ACA, unless the FSA within the plan is designed to be a HIPAA-excepted benefit. Specifically:
- If an employer offers a health FSA allowing employee salary deferrals up to $2,500 per year, the employer must make available group health coverage that is not limited to excepted benefits. The key is that the coverage just has to be made available. It does not require the employee to enroll in the coverage if the employee elects to contribute to the health FSA (unlike the HRA integration rule above). The guidance provides that any group health coverage may be offered as long as it is not construed as HIPAA-excepted coverage.
- If the employer does not offer group health coverage, a health FSA in the cafeteria plan may limit the benefits allowed to be reimbursed for dental or vision expenses only.
- If an employer wants to make employer contributions to the health FSA in a cafeteria plan, the benefit cannot exceed two times the participant’s salary deferral election for the year, or if greater, it cannot exceed $500 plus the amount of the participant’s salary deferral election. Note: SIMPLE cafeteria plans, a new type of cafeteria plan created under the ACA, which require mandatory employer contributions, appear to violate the ACA if more than $500 is provided to the employee in the health FSA within the plan. It appears that any contribution over $500 could be directed to pay for other benefits such as dependent care or be directed to a health savings account to avoid violating this rule, but more guidance is needed.
Health FSA $500 Carryover Option – An employer can now amend their cafeteria plan document to allow employees to carry over up to $500 of any unspent amount in their health FSA at year-end to the following plan year. The carryover amount can be used to reimburse any expenses incurred in the following plan year. An employer may adopt this rule as early as the 2013 plan year. This carryover is in addition to the $2,500 of deferral that an employee can elect in each plan year. The employer must also amend its plan to eliminate any grace period provision adopted that previously allowed an employee to incur expenses after the end of the plan year (75 days was previously allowed, if the plan permitted). They must eliminate the grace period provision from the plan before the end of the first plan year in which the carryover is effective.
Note: See article "Small Employers Can Use HRAs and Reimburse for Individual Health Insurance Premiums" dated December 21, 2016, for subsequent guidance for small employers (with under 50 employees).
- Review plans – Cafeteria plans and HRAs
- Amend to provide only HIPAA-excepted benefits in the HRA or health FSA.
- HRAs must be integrated with a group health plan, and health FSA participants must be eligible for an employer-sponsored group health plan if the health FSA provides for reimbursement of medical expenses.
- Terminate provisions or plans. (HRAs may need to terminate, and health FSA provisions may need to be taken out of a cafeteria plan or modified for compliance.)
- Amend provisions for compliance (put spend-down or opt-out provisions in the HRA) and modify plan-related procedures.
- Communicate – Make sure employees know about the changes and are provided guidance to plan accordingly.
The guidance provides that the deadline for plan amendments was the end of 2014 to be in compliance with the mandates. Going forward, plan changes and the related employee communications that are needed will require that documentation be prepared well before the effective date of changes.
If you have questions or need assistance, please contact your benefits consultant or your Wipfli relationship executive. Your Wipfli benefits team is ready and available to assist you with any needs you have.