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Implementing Health Reform: Health Reimbursement Arrangements And More



January 25th, 2013

Editor’s note: This post was augmented on January 26, 2013, by a concluding section on Paperwork Reduction Act listings dealing with information collection and application forms.

The months of November and December of 2012 and January of 2013 have been a very busy season in the implementation of the Affordable Care Act.  The Departments of Health and Human Services, Treasury, and Labor have released a series of proposed rules dealing with the market reforms, essential health benefits, actuarial value, employer responsibility, Medicaid eligibility, the exchanges, and other topics.  Another proposed rule on the individual mandate requirement is under review at the Office of Management and Budget and should be released momentarily.

But federal implementation efforts have not been limited to formal rulemaking.  The agencies continue to release informal guidance as well, which also plays an important role in ACA implementation.  On January 24, 2013, the three implementing agencies jointly issued their eleventh series of frequently asked questions addressing some seemingly small but important questions that have arisen concerning the ACA.   Perhaps the most important, to my mind, involve the status post-2013 of stand-alone health reimbursement arrangements.

How The Affordable Care Act Will Affect HRAs

The HRA was created by the IRS in 2002 to permit employers (and employee organizations) to provide pre-tax dollars to employees to pay for medical care and services. Revenue Notice 2002-45, which recognized the HRA, described it as follows:

An HRA is an arrangement that: (1) is paid for solely by the employer and not provided pursuant to salary reduction election or otherwise under a § 125 cafeteria plan; 2) reimburses the employee for medical care expenses . . . incurred by the employee and the employee’s spouse and dependents . . .; and (3) provides reimbursements up to a maximum dollar amount for a coverage period and any unused portion of the maximum dollar amount at the end of a coverage period is carried forward to increase the maximum reimbursement amount in subsequent coverage periods.

HRAs have become quite common over the past decade.  They are often coupled with high deductible health plans to provide employees with both catastrophic conventional coverage above the deductible range and assistance in meeting expenses incurred before the deductible is satisfied.

The problem is that section 2711 of the Public Health Services Act, added by the ACA, prohibits annual dollar limits on health plan coverage, and HRAs are by definition limited in the dollar amount they offer for coverage.  In the rules implementing 2711, the agencies clarified that where an HRA was integrated with a conventional group health plan, the HRA would not violate 2711 because the group health plan would not be able to impose annual dollar limits.

That conclusion, however, left open the question of “stand-alone” HRAs.  In some instances HRAs are not integrated into a group health plan, but rather simply offered to employees to allow the employee to purchase conventional insurance in the individual, non-group, market with pre-tax dollars.  Some employers had hoped that with the advent of the exchanges in 2014, they would be able to offer their employees a fixed dollar contribution through an HRA, which would permit the employee to take advantage of the tax subsidies currently available through HRA coverage but get the employer out of the health insurance business.

Further, some consumer advocates had hoped that employees would be able to couple funds offered by employers through HRAs with advance premium tax credits available through the exchanges to make individual health policies truly affordable.  Large employers, who must offer adequate and affordable health care coverage to their full time employees (and dependents) or pay a penalty if an employee ends up receiving premium tax credits, would probably not have been able to use this strategy, as it is hard to see how a stand-alone HRA could meet the “adequate and affordable test,” but it could be an attractive strategy for small employers who wish to move to a defined contribution approach to health benefits.

The FAQ clarifies that this approach is not possible under section 2711.   The agencies intend to issue further guidance on the issue, but have concluded that stand-alone HRAs used to purchase individual coverage will not be considered to be integrated coverage that complies with the annual dollar limit requirement.  Indeed, if employees are offered an HRA and group coverage, but decline the group coverage, the stand-alone HRA coverage will violate section 2711.  The FAQ does permit amounts accumulated in a stand-alone HRA prior to January 1, 2014 to be drawn on after that point if certain conditions are met.

How The Affordable Care Act Will Affect Fixed-Dollar Indemnity Coverage

Another issue settled by the FAQ is the status of fixed-dollar indemnity coverage.  The private insurance regulatory requirements of the ACA are built on the framework of the pre-existing Health Insurance Portability and Accountability Act (HIPAA).  HIPAA did not apply to “excepted benefits,” and neither, therefore, does the ACA.  Most excepted benefit plans may include some medical benefits, but are clearly not comprehensive health insurance of the sort that the ACA was meant to reform.  These include, for example, long-term care insurance, worker’s compensation, automobile medical payment insurance, or credit insurance.

One category, however, “hospital indemnity or other fixed indemnity insurance,” sounds a lot like conventional health insurance coverage.  Before managed care became common in the 1980s, most commercial health insurance was what was then known as indemnity insurance.  Enrollees paid for medical services and were then indemnified, often based on a fixed fee schedule, by their insurers.  Advertisements for this kind of coverage have begun to appear again.  Some insurers have been pushing indemnity coverage as a replacement for the soon-to-be illegal “mini-med” policies.  They clearly impose dollar limits on coverage, which are otherwise prohibited by section 2711 discussed above.

Consumer advocates have been concerned about these policies.  Not only do they evade all of the consumer protections afforded by the ACA, they also do not meet the minimum essential coverage (individual mandate) requirements.  A consumer could purchase such a policy, believing that it offered health insurance coverage, and not only be inadequately insured but also end up having to pay the penalty at the end of the year for having been effectively uninsured.

The FAQ clarifies that such policies are not legal under the ACA.  Under regulations implementing HIPAA, fixed dollar indemnity policies must offer a fixed dollar amount per day of hospitalization or illness.  They are meant to supplement, not replace, conventional health insurance, by covering income loss or other non-insured expenses.  Policies that pay on a per-service rather than a per-time period basis are not fixed dollar indemnity policies under the ACA and thus must meet all ACA requirements, including the prohibition on annual and lifetime dollar limits.  This FAQ shuts down what could have been a major loophole in the protection offered by the ACA, as well as a source of consumer confusion.

The FAQ notes that, on the other hand, non-Medicare supplemental drug benefits provided to retirees by employers through employer group waiver plans do qualify as excepted benefits and are not subject to the ACA insurance reforms.  They are subject to other regulations promulgated by the Centers for Medicare and Medicaid Services, and further guidance on these plans will be forthcoming from CMS.

Other Issues In The FAQ

Additionally, the FAQ addresses a number of other topical issues.  First, it clarifies that the provisions of the ACA that prohibit insurers and the government from collecting information on the lawful ownership, possession, use, or storage of guns and ammunition does not prohibit physicians from discussing firearms with their patients.  It recognizes that physicians can play an important role in promoting gun safety.  Second, it postpones the effective date for a requirement that employers provide their employees with a notice disclosing 1) that the employee may be eligible for exchange coverage (although the employee can receive no employer contributions towards the cost of premiums if the employee goes to the exchange) and 2) whether or not employer coverage meets ACA adequacy requirements (60 percent actuarial value). This requirement was supposed to go into effect on March 1, 2013, but it is delayed until more information is available on the exchanges later in the year.  The government also intends to make available a downloadable template to assist employers with complying with this requirement.

Finally, the FAQ clarifies that a joint board of trustees of a multiemployer plan or the plan sponsor of a retiree-only VEBA may, under certain circumstances, use plan assets to pay the fee imposed on self-insured (as well as insured) plans to finance the Patient Centered Outcomes Research program without violating ERISA.   This is not true of all plan sponsors, as will be clarified through further guidance.

Information Collection And Application Forms

On January 25, 2013, HHS also published four Paperwork Reduction Act (PRA) listings.  The first concerns information that CMS intends to collect from states that operate their own reinsurance or risk-adjustment programs and from insurers that participate in the reinsurance, risk-adjustment, and risk-corridor programs.

The second includes proposed paper and online uniform application forms to be used for insurance affordability programs and enrollment through exchanges and Medicaid and Children’s Health Insurance Program agencies   This listing includes not only the forms and online questions but also links to two videos at the CMS YouTube site demonstrating the application process.    The listing estimates that it will take half an hour to complete the online application form for an applicant seeking assistance and fifteen minutes for online enrollment for an individual seeking only to enroll in a plan without assistance.  It will take an estimated 45 minutes for an applicant to fill out the paper application form if the applicant is seeking assistance.

Finally, HHS also published PRA listings for the online application questions and paper application forms for employers  and employees  enrolling in coverage through the SHOP exchanges.  HHS estimates that it will take about 7 minutes to enroll an employer and about 5 minutes to enroll each employee online.

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3 Trackbacks for “Implementing Health Reform: Health Reimbursement Arrangements And More”

  1. Regs Limit Use of HRAs for Exchange-Purchased Coverage
    October 10th, 2013 at 4:20 pm
  2. Saxon Financial Consulting » Regs Limit Use of HRAs for Exchange-Purchased Coverage
    October 10th, 2013 at 4:17 pm
  3. Remuneration Tax Blog » Blog Archive » New DOL FAQs on the Affordable Care Act
    February 4th, 2013 at 5:16 pm

10 Responses to “Implementing Health Reform: Health Reimbursement Arrangements And More”

  1. maddent21 Says:

    It has been almost 8 months since the last posting on this subject matter and we are only 17 days away from 10/1/2013.

    Has there been any further clarification on applicability of employer contributions via an HRA being acceptable for reimbursement of individual premiums in an exchange?

    Thanks,

  2. Timothy Jost Says:

    Treasury has promised further guidance on HRAs, which clearly seems necessary. This is clearly part of the high price of reforming our health care system relying on the tax code.

  3. marvinlzinn Says:

    This description is enough to describe the problem. Government rules are ridiculously complicated about everything they do. Wouldn’t it be better if the money was spent where needed instead of arranging more mistakes for time and potential errors? (Elect me as President. My first task will be to cut the government and law size in half – each year.)

  4. ricklindquist Says:

    “I don’t think use of a flex plan (which in any event isn’t an HRA) works because section 1515 of the ACA amended IRC 125 to prohibit (as of January 1, 2014) the use of funds in a flexible spending account to purchase an individual plan through an exchange unless the employer offers a group plan through the exchange as well. ”

    The definition they use for the health flexible spending arrangement exception is not 125 (it’s 106).

  5. ricklindquist Says:

    There are 5 types of HRA plan designs that escape the 2711 rules under existing regulations. See http://www.law.cornell.edu/cfr/text/29/2590.715-2711 for existing regulations.

    5 Types of HRAs That Avoid The Annual Limits Requirements
    1.”Integrated” HRAs
    According to the existing regulations, “when HRAs are integrated with other coverage as part of a group health plan and the other coverage alone would comply with the requirements of PHS Act section 2711, the fact that benefits under the HRA by itself are limited does not violate PHS Act section 2711 because the combined benefit satisfies the requirements.”

    As expected, the new FAQs clarify that an HRA is not considered “integrated” unless:

    the employer offers primary group health insurance coverage that alone satisfies Section 2711, and
    the HRA is only made available to employees who are also enrolled in the primary group health plan coverage in #1.
    Test: Is the HRA integrated with group health insurance coverage that complies with the lifetime and annual limit restrictions? If so, the HRA generally avoids the annual limit requirements.

    2. “Flexible Spending Arrangement” HRAs
    According to the existing regulations, “a health flexible spending arrangement (as defined in section 106(c)(2)) is not subject to the [annual limit requirements]”

    According to IRS Notice 2002-45, “assuming that the maximum amount of reimbursement which is reasonably available to a participant under an HRA is not substantially in excess of the value of coverage under the HRA, an HRA is a flexible spending arrangement (FSA) as defined in § 106(c)(2).”

    Test: Does the HRA qualify as a flexible spending arrangement as defined in Section 106(c)(2)? If so, the HRA generally avoids the annual limit requirements.

    Section 106(c)(2) Flexible spending arrangement – For purposes of this subsection, a flexible spending arrangement is a benefit program which provides employees with coverage under which—

    (A) specified incurred expenses may be reimbursed (subject to reimbursement maximums and other reasonable conditions), and

    (B) the maximum amount of reimbursement which is reasonably available to a participant for such coverage is less than 500 percent of the value of such coverage.

    3. “Excluded” HRAs
    According to the existing regulations, the section 2711 rules “do not prevent a group health plan, or a health insurance issuer offering group health insurance coverage, from placing annual or lifetime dollar limits with respect to any individual on specific covered benefits that are not essential health benefits to the extent that such limits are otherwise permitted under applicable Federal or State law.”

    Therefore, HRAs that exclude all essential health benefits and only reimburse non-essential health benefits (e.g. premium expenses) avoid the annual limit requirements.

    Test: Does the HRA only reimburse non-essential health benefits? If so, the HRA generally avoids the annual limit requirements.

    4. “Excepted” HRAs
    The Affordable Care Act and the interim regulations make it clear that PHS section 2711 does not apply to HRAs that qualify as “excepted benefits” under ERISA (see the federal definition of “group health plan”, 42 USCS § 300gg-91).

    Test: Does the HRA qualify as excepted benefits? If so, the HRA generally avoids the annual limit requirements.

    5. “Retiree” HRAs
    According to the interim regulations, a “retiree-only HRA is generally not subject to the rules in PHS Act section 2711 relating to annual limits.”

    Test: Does the HRA only cover retirees? If so, the HRA generally avoids the annual limit requirements.

    Source: http://www.zanebenefits.com/blog/bid/262620/New-Guidance-on-Integrated-Health-Reimbursement-Arrangements

  6. Timothy Jost Says:

    I may be wrong on this, but PHSA 2711 refers to “covered benefits that are not essential health benefit,” it does not refer to qualified medical expenses. Qualified medical expenses include health insurance premiums, but I don’t see that “covered benefits” do, as “covered benefits” refers to benefits covered under a health plan, not the premiums for the plan. Also, 106(c) has to do with coverage of long term care premiums, which are excluded from coverage under the interim final 2711 rule. The relevant section for FSAs would be section 125, which is amended by ACA section 1515 to not allow premium contributions for exchange coverage under an FSA unless integrated into a group plan As far as I know, rules have not been issued to date covering 1515. In any event, the agencies have promised further guidance on this, which is clearly needed.

  7. JNahacky Says:

    Thanks for the reply. But I was not refering to an FSA under section 105(h), but the exemption in the interim final regulations on Annual limits that says an HRA that is a flexible spending arrangment under section 106( c ) is exempt from the annual limit requirement. Under that section as long as the maximum amount of reimbursement that is available to a participant is less than 500% of the value of such coverage, the HRA would qualify as a Flexible Spending arrangement and be exempt. Since the HRA plan would only reimburse a specific dollar amount or percent of the individual policy premium, I do not see how the maximum amount available would ever be more than 500% of the value of the benefit.

    Interstering comment about a premium reimbursement not being a covered benefit. If it is not a covered benefit, then is it subject to any ACA provisions?

  8. dzody Says:

    Without delving too deeply into the analysis, my opinion is as follows:

    This most recent FAQ guidance does NOT appear to prohibit an employer who is intent on a pay/exit strategy from establishing a tax-advantage premium-only HRA for active employee to reimburse themselves for premiums for individual-market insurance policies in a public or private Exchange. [Because premiums likely do not qualify as "essential health benefits", a premium-only HRA should not be impacted by the annual/lifetime dollar limit restrictions; furthermore, the fact that a premium-only HRA is not deemed to be "integrated" with an individual-market insurance policy should be irrelevant.

    This FAQ guidance DOES appear to prohibit an employer from establishing a tax-advantage HRA for active employees to reimburse themselves for premiums for individual-market insurance policies in a public or private Exchange, as well as other OOP costs. [While premiums likely do not qualify as "essential health benefits", the other OOP costs likely will be for essential health benefits and thus are impacted by the annual/lifetime dollar limit restrictions; furthermore, the fact that such an HRA is not deemed to be "integrated" with an individual-market insurance policy is relevant.]

    It’s possible that this FAQ guidance is foreshadowing future guidance that may ultimately prevent an employer from “playing” by establishing a tax-advantage premium-only HRA for active employees to reimburse themselves for premiums for individual-market insurance policies in a public or private Exchange (although a DC approach to purchase “group” coverage in a private Exchange may remain viable). Time will tell.

  9. Timothy Jost Says:

    Very good question. I don’t think use of a flex plan (which in any event isn’t an HRA) works because section 1515 of the ACA amended IRC 125 to prohibit (as of January 1, 2014) the use of funds in a flexible spending account to purchase an individual plan through an exchange unless the employer offers a group plan through the exchange as well. I also don’t think that a premium payment contribution can be characterized as a “covered benefit” within the meaning of PHSA section 2711, because the provision refers to benefits covered by a group policy or individual plan (like adult dental care), not funds used to purchase an individual plan.

  10. JNahacky Says:

    Great Blog on the impact of ACA on HRA’s. But I am not clear on what you are saying about how the annual limit applies to stand-alone HRA’s whose only benefit is reimbursement of individual health insurance premiums. Wouldn’t such a plan design avoid the annual limit requirement as a permissible limit on a non essential health benefit or fall under the exception for health flexible spending arrangements?

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