IRS Further Clarifies ACA's Impact on Employer Health Reimbursement Arrangements

IRS Notice 2015-87, issued December 17, 2015, provides the latest IRS guidance regarding the Affordable Care Act's impact on employer health reimbursement plans. Although IRS unveiled no new “bombshells” in the Notice, it does provide further clarification important to small employers offering health care reimbursement arrangements to their employees. For information about prior guidance on this subject, please reference this article.

HRAs Covering Fewer than Two Participants Who Are Current Employees

The Notice reiterates that HRAs offered to “fewer than two participants who are current employees” are not subject to ACA market reforms. As such, employers offering such plans will not be subject to penalties. These compliant HRAs include retiree-only plans, which provide benefits only to former employees, as well as plans that provide coverage to only one employee-participant (where there are no other eligible employees). According to the guidance, these HRAs can be used to purchase individual market coverage. It is important to note, however, that these plan are still employer-sponsored plans for any month during which funds are retained in the HRA. As such, the Notice restates that a participant “with available funds for any month will not be eligible for a premium tax credit under § 36B for that month.”

HRAs Used to Cover Family Medical Expenses

Notice 2013-54 provided that an HRA may be integrated with an employer group health plan under certain circumstances. A properly integrated HRA is compliant with ACA market reforms. The new guidance clarifies that everyone covered by an HRA must be enrolled in the plan to which the HRA is integrated. Specifically, a family HRA (one covering the expenses of an employee’s spouse and/or dependents) cannot be integrated with employee self-only coverage. In other words, if an employee’s family members are not enrolled in the employer-provided group health plan, they cannot be covered under the HRA. Conversely, if the family members are enrolled in the employer’s group health insurance, they can participate in the HRA.

The Notice recognizes that many plans have been violating this requirement. As such, it offers temporary relief from penalties:

• IRS will not treat 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. (No need to report violations for plans that have been offering these non-integrated HRAs).
• IRS will not 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. 

This means that IRS is providing an additional year of penalty relief to employers offering otherwise integrated plans. If the only violation is that the family members are not enrolled in the other group health insurance, IRS will not enforce penalties against 2016 plans. To be integrated with the employer’s group health plan, the HRA must meet all the other requirements of integration set forth in Notice 2013-54. In addition, the employer will still be required to report the coverage as minimum essential coverage (via a form 1095-B) for each individual covered by the HRA.

One detail not mentioned in this Notice is that Notice 2013-54 provided that an employer HRA could be integrated with a group health plan offered by the employer of the employee’s spouse. Because nothing in the new guidance indicates otherwise, it should still be acceptable for an employee’s family members to be covered by an employer-sponsored HRA as long as the family members are enrolled in the group health plan integrated with that HRA, whether that plan is offered by the employee’s employer or the employer of the employee’s spouse.

HRA’s Reimbursing only Excepted Benefits

The Notice again states that HRA’s covering only excepted benefits are not subject to market reforms and can continue to be offered. These excepted benefits include:

•             Accident-only coverage

•             Disability income

•             Certain Long-term care

•             Limited scope dental and vision benefits

•             Employee Assistance Program benefits

•             Medicare Supplement benefits

In other words, a standalone HRA that reimburses an employee for a dental plan purchased on the individual market is not subject to ACA market reforms and can be offered without penalty as long as the plan provides specifically that it only covers excepted benefits. The guidance specifically states that if the HRA would reimburse the employee for non-excepted benefits, it does violate ACA market reforms, even if it only reimburses the employee for excepted benefits. Consequently, employers must ensure that their plan documents clearly state that the HRA reimburses employees only for excepted benefits.

Section 125 Premium Reimbursement Plans

Although Notice 2013-54 provided that an employer group health plan used to purchase individual coverage would violate ACA market reforms, some urged that a Section 125 premium reimbursement plan fell outside of the IRS definition of a “group health plan.” Consequently, some continued to argue that such reimbursement plans would not be subject to market reforms.

The new guidance ends any uncertainty regarding this practice. The Notice states that an employer-sponsored Section 125 cafeteria plan that reimburses employees for the cost of individual market coverage is a “group health plan” for purposes of ACA market reforms. Thus any Section 125 cafeteria plan reimbursing employees for the cost of coverage purchased on the individual market is an employer payment plan failing to satisfy market reforms. Any employer offering such a plan is subject to penalties in amounts up to $100 per day per employee. The Notice clarifies that such a plan is impermissible whether or not the plan is funded solely by salary reduction or by employer contributions, such as flex credits.

In addition to the above provisions, IRS Notice 2015-87 provides additional guidance of particular relevance to applicable large employers. For more detail on these provisions, please read the Notice directly.