So Complex It s Scary: Friday the 13 th Affordable Care Act Guidance on HRAs, Health FSAs, and EAPs

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1 So Complex It s Scary: Friday the 13 th Affordable Care Act Guidance on HRAs, Health FSAs, and EAPs September 2013 The Department of Labor (DOL), Treasury, and Health and Human Services (HHS) (the agencies) issued technical guidance on Friday, September 13, 2013 that clarified the application of the Patient Protection and Affordable Care Act s (Affordable Care Act s) group market reforms to health reimbursement arrangements (HRAs), employer payment plans, health flexible spending accounts (health FSAs), and employee assistance plans (EAPs). The guidance focused, in particular, on the application of the rules prohibiting annual dollar limits on essential health benefits (EHBs) and prohibiting cost sharing for certain preventive health services on an in-network basis. The guidance DOL Technical Release and Internal Revenue Service (IRS) Notice applies to plan years beginning on and after January 1, 2014, but the guidance can also be applied for all prior periods. This Aon Hewitt bulletin discusses the impact of this guidance on employer-provided health care plans. HRAs HRAs Integrated With Another Group Health Plan In guidance released on January 24, 2013, the agencies had stated that if an HRA is integrated with other coverage as part of a group health plan, and the other coverage alone would comply with the annual dollar limit prohibition, then the HRA would not fail to comply with the annual dollar limit prohibition. The Friday the 13 th guidance offers two methods for determining whether an HRA is integrated with a group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements. Neither method requires that the HRA and the integrated coverage share the same plan sponsor, the same plan document or governing instruments, or file a single Form 5500, if applicable. Integration Method 1: Minimum Value Not Required Under this first method, the HRA and group health plan must meet the following five requirements to be considered integrated : The employer offers a group health plan (other than an HRA) that does not consist solely of excepted benefits. An excepted benefit includes dental or vision benefits that meet specific requirements. For example, a dental benefit plan is an excepted benefit if it is: 1) offered under a separate policy of insurance from the group health plan; or 2) a participant has the right not to receive the dental coverage and, if the participant elects dental coverage, an additional contribution is required for that coverage. 1

2 The employee covered by the HRA is actually enrolled in a group health plan that does not consist solely of excepted benefits, regardless of whether the employer sponsors the plan (e.g., a spouse s group health plan) (non-group HRA coverage); The HRA is available only to employees enrolled in non-hra group coverage; The HRA is limited to reimbursement of one or more of the following: copayments, coinsurance, deductibles, premiums under the non-hra group coverage, as well as medical care that does not constitute EHBs; and The HRA provides either that employees: 1) can permanently opt out of and waive future reimbursements from the HRA at least annually and upon termination of employment; or 2) forfeit the remaining HRA amounts upon termination of employment. According to the guidance, the opt-out feature is essential because benefits provided by an HRA will generally be considered minimum essential coverage, thereby precluding an individual from qualifying for a premium tax credit. Integration Method 2: Minimum Value Required Under this second method, HRA reimbursements are not restricted but the non-hra group coverage must meet the minimum value requirement (cover at least 60% of the total allowed cost of benefits). For an HRA to be considered integrated under this method, the HRA must meet the following four requirements: The employer offers a group health plan that provides minimum value; The employee covered by the HRA is actually enrolled in a group health plan that provides minimum value, regardless of whether the employer sponsors the plan (non-hra minimum value group coverage); The HRA is available only to employees actually enrolled in non-hra minimum value group coverage, regardless of whether the employer sponsors that coverage; and The HRA provides either that employees: 1) can permanently opt out of and waive future reimbursements from the HRA at least annually and upon termination of employment; or 2) forfeit the remaining HRA amounts upon termination of employment. The guidance includes examples for each integration method and both contemplate attestations from employees if they utilize a non-hra group health plan that is not sponsored by the employer. Other HRA Guidance HRAs and Individual Market The guidance states that neither an employer-sponsored HRA nor another type of group health plan (e.g., an employer payment plan) can be integrated with individual market coverage. This type of HRA would violate the annual dollar limit prohibition and the preventive care requirements. Retiree-Only HRAs The agencies reiterate that HRAs that are limited to retirees and are part of a stand-alone retiree medical plan are not subject to the group market reforms (including the prohibition on annual dollar limits and the requirement on preventive health care services) under the exemption for plans with fewer than two participants who are current employees on the first day of the plan year. As a result, a retiree-only HRA must be part of a separate legal plan with fewer than two participants who are 2

3 current employees on the first day of the plan year. The stand-alone retiree medical plan should be filed with an IRS Form 5500 that includes fewer than two current employees in the participant count. The guidance provides that a retiree-only HRA will be considered minimum essential coverage, 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). The agencies acknowledge that this type of arrangement could be used to purchase coverage in the individual market. This also means that a retiree covered by a stand-alone retiree-only HRA would not be eligible for a premium tax credit. Amounts Newly Available Under an HRA If an employer offers an HRA that is integrated with a group health plan sponsored by that same employer, amounts newly made available under an HRA can be counted toward the minimum value or affordability determinations but not both. If the amounts newly made available for the current plan year can be used only to reduce cost sharing for covered medical expenses, the newly available amounts count only toward the minimum value requirement. If the amounts newly made available for the current plan year can be used to pay premiums or to pay both premiums and cost sharing, the newly available amounts count only toward the affordability requirement. If an HRA is integrated with a group health plan offered by an employer other than an employer who is sponsoring the HRA, the HRA does not count toward the affordability or minimum value requirement of the group health plan offered by the other employer. When Employee Is No Longer Covered by Group Health Plan Integrated With HRA If an employee is covered by an HRA that is integrated with a group health plan and then ceases to be covered by the group health plan, any unused HRA amounts that were credited while the HRA was integrated with other group health coverage may be used to reimburse medical expenses without causing the HRA to fail to comply with the annual dollar limit prohibition. The guidance notes that the HRA is an eligible employer-sponsored plan and thus considered minimum essential coverage, which will preclude eligibility for a premium tax credit. Group Health Plan Does Not Cover Category of EHBs If a group health plan provides minimum value (and meets Integration Method Two), an HRA integrated with a group health plan will not be treated as imposing an annual dollar limit even if the group health plan does not cover a category of EHBs and the HRA covers that category of EHBs yet limits the coverage to the HRA s maximum benefit. Transition Rule From January 24, 2013 While not part of this guidance, the agencies previously indicated that regardless of whether or not an HRA is integrated with other group health plan coverage, unused amounts credited before January 1, 2014, consisting of amounts credited before January 1, 2013 and amounts that are credited in 2013 under the terms of an HRA as in effect on January 1, 2013 may be used after December 31, 2013 to reimburse medical expenses without causing the HRA to fail to comply with the prohibition on annual and lifetime dollar limits. Health FSAs Health FSAs as Excepted Benefits Not Subject to Affordable Care Act Market Reforms Although health FSAs are group health plans, they will be considered to provide only excepted benefits if the employer also makes available a group health plan that does not provide only excepted benefits and the 3

4 health FSA limits the maximum benefit payable to two times the participant s salary reduction election for the year (or, if greater, $500 plus the amount of the participant s salary reduction election). If a health FSA does not qualify as excepted benefits, the health FSA will be subject to the market reforms, including the preventive services requirements, and therefore, likely cannot meet the requirements since it is not integrated with a group health plan. Whether a Standalone HRA Can Be Treated as a Health FSA The agencies are considering whether an HRA may be treated as a health FSA for purposes of the exclusion from the annual dollar limit prohibition. Of course, this is only helpful if the HRA is able to meet the definition of a health FSA that is an excepted benefit. Health FSAs Not Offered Through a Cafeteria Plan Unlike the exemption for health FSAs offered through an Internal Revenue Code (Code) Section 125 cafeteria plan, health FSAs that are not offered through a cafeteria plan must comply with the annual dollar limit prohibition on EHBs. The guidance states that the agencies will amend the annual dollar limit prohibition regulations to conform this new guidance retroactively applicable as of September 13, EAPs EAPs as Excepted Benefits The guidance states that the agencies intend to amend previous regulations to provide that benefits under an EAP are considered excepted benefits, but only if the program does not provide significant benefits in the nature of medical care or treatment. Employers may rely on this statement until final regulations are issued, but at least through the end of What the guidance does not do, however, is provide employers with any bright-line test for determining what constitutes significant benefits in the nature of medical treatment. Instead, the guidance permits employers to make a reasonable good faith interpretation as to whether the EAP provides significant benefits in the nature of medical care or treatment. That determination, however, would apparently apply only until final regulations are issued. If the employer determines that the EAP is an excepted benefit, the EAP would not be required to comply with the group market reforms, including the summary of benefits and coverage (SBC) requirement and would not qualify as minimum essential coverage. Exchange Coverage Through a Cafeteria Plan Effective for taxable years beginning after December 31, 2013, an employer may not provide a qualified health plan (QHP) through an Exchange as a benefit under the employer s cafeteria plan. The guidance notes, however, that some states already allow employees to enroll in Exchange coverage as a benefit under a cafeteria plan. The guidance provides that, if a cafeteria plan has a non-calendar year plan year as of September 13, 2013, the employer may continue to provide Exchange coverage through a cafeteria plan for the remainder of that plan year. Enrollment in a QHP through an Exchange as a benefit under a Code Section 125 cafeteria plan precludes qualification for a premium tax credit. 4

5 Resources DOL Technical Release is available at: IRS Notice is available at: Aon Hewitt s Regulatory Guidance Under the Affordable Care Act page, which provides links to Aon Hewitt bulletins on Affordable Care Act guidance and regulations, is available at: 5

6 About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit Aon plc This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Hewitt s preliminary analysis of publicly available information. The content of this document is made available on an as is basis, without warranty of any kind. Aon Hewitt disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Hewitt reserves all rights to the content of this document. 6