The Treasury Department and the Internal Revenue Service (IRS) have issued additional guidance on how the Affordable Care Act affects Health Reimbursement Arrangements (HRAs).1 Plan sponsors should review all HRA plan designs during 2016 to make sure that the plan documents and operations follow all applicable rules, including new requirements set out in the latest guidance.
Medical reimbursement accounts (known as HRAs) are a popular group health plan design feature. They provide employees with a spending account up to a limit to reimburse them for qualified medical expenses. An HRA can cover both active employees and retirees (or just one group or the other), as well as their dependents. HRA contributions must be made exclusively by the employer or other plan sponsor; no participant pre-tax or after-tax contributions are permitted. Balances remaining in the HRA at the end of a coverage period may be carried forward if the plan documents permit this.2
Prior to the Affordable Care Act, HRAs were considered very flexible plan designs and could be provided on a stand-alone basis. This meant that the HRA could reimburse medical expenses regardless of whether the employee was enrolled in other non-HRA group coverage. As discussed below, this is no longer allowed under guidance implementing the Affordable Care Act.
HRAs are considered group health plans, and, as such, are subject to the group health plan standards of the Affordable Care Act, including the ban on annual dollar limits. As a result, plan sponsors can no longer offer an HRA on a stand-alone basis unless the plan is a separate retiree-only plan.3 The HRA may only be offered to individuals who also enroll in other non-HRA group health coverage that complies with all applicable requirements, including the ban on annual dollar limits.
Plan sponsors must also offer employees (or former employees) the ability to permanently opt out of and waive future reimbursements from the HRA at least once per year and upon termination of employment. A new final rule published in December 2015 adds new flexibility by permitting plan sponsors to allow participants to waive their HRA balance temporarily, until a fixed date or event.4
Notice 2015-87 provides several important clarifications to the rules governing HRAs.
Notice 2015-87 provides several important clarifications to the rules governing HRAs that cover actives or active and retirees in a single plan (i.e., not a retiree-only HRA):
Finally, Notice 2015-87 states that an employer cannot offer a Section 125 cafeteria plan that reimburses individuals for coverage on the individual health insurance market, whether the plan is funded by the employer or through salary reduction.
Retiree-only plans that offer HRAs are not subject to the rules described above. Notice 2015-87 makes the following points with respect to retiree-only HRAs:
Plan sponsors should review all HRA plan designs during 2016. At a minimum, plan sponsors must ensure that HRA documents are amended to exclude coverage for spouses and/or dependents not enrolled in a group health plan. These amendments need to be effective no later than the plan year beginning on or after January 1, 2017. Plans should be reviewed for operational compliance as well.
For more information about how these new rules may affect your plan, please contact your Sibson consultant or the Sibson office nearest you. Sibson can be retained to work with plan sponsors and their legal counsel on compliance issues.
1 Notice 2015-87, which was released on December 16, 2015, is available on the IRS website. Notice 2015-87 also contains new information about flex credits and opt-outs that are discussed in Sibson Consulting’s February 9, 2016 Update.
4 For more information about this flexibility, see Sibson’s December 16, 2015 Update, “Departments Release Series of Final Rules Under the Affordable Care Act.”
5 For additional information about the Affordable Care Act’s reporting requirements, see Sibson’s October 1, 2015 Update, “The IRS Has Issued Final Instructions on Affordable Care Act Reporting that Clarify Key Issues for Employers.”
Update is Sibson Consulting’s electronic newsletter summarizing compliance news. Update is for informational purposes only and should not be construed as legal advice. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.
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