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Recent IRS Guidance Impacting Health Reimbursement Plans and Cafeteria Plans

IRS Notice 2013-54
In September 2013 the IRS issued Notice 2013-54, which attempted to answer several questions concerning the implementation of the Affordable Care Act (the ACA). The following is our review of some of the pertinent guidance provided by IRS Notice 2013-54. Keep in mind that future guidance may require changes in our interpretation.

Are “Stand Alone” Health Reimbursement Accounts permitted?
Yes, but only if the HRA:

1) provides benefits only to retired employees, or
2) provides only “excepted” benefits, such as dental or vision.
An example of a permitted design is an HRA that credits employees’ “accounts” with $200 per month while employed, but the employee cannot file claims against the “account” until after the employee retires. All other HRAs must be “integrated” with a group major medical policy to comply with the ACA’s prohibition on annual benefit limits. The Notice indicates that if the “integrated” group health plan does not provide “minimum value”, the types of medical expenses that may be reimbursed by the HRA must be limited to deductibles, co-insurance, co-payments and certain other medical expenses specified in the Notice. HRAs that are not “integrated” may continue to exist and pay benefits until existing account balances have been exhausted, but new amounts may not be added after December 31, 2013. New amounts may be added during 2013, but only under the terms of the plan in effect on January 1, 2013. This prohibits an employer from “dumping” large amounts into employee HRA accounts prior to December 31, 2013.

May Health Reimbursement Accounts Reimburse Individual Major Medical Insurance Premiums for Current Employees?
No.

May a “Retiree Only” Health Reimbursement Account Reimburse Individual Major Medical Insurance Premiums
for Retired Employees?
Yes.

Can Employers Reimburse Individual Major Medical Insurance Premiums on an After-Tax Basis?
Yes.

Why would an employer want to do this?

    • Fixes Employer benefits costs
    • No discrimination rules to satisfy
    • Convenience of Payroll Deduction for Employees
    •  Post ACA Guaranteed Issue
    • Shows value to employees
    • Enrollments can be done on a Private Marketplace
    • Preserves Public Marketplace Subsidy for Employees

May Cafeteria Plans Reimburse Individual Major Medical Insurance Premiums Pre-Tax?
Maybe.

The IRS Notice did not specifically address this issue, but did suggest that Cafeteria Plans could no longer offer pre-tax reimbursement of individual major medical premiums. Several commentators have pointed out that such an outcome would directly nullify several statutory and regulatory provisions, including provisions of the ACA itself. They suggest, therefore, that the failure of the IRS to address this issue was intentional.

We feel that as of today, individual major medical insurance premiums can still be reimbursed pre-tax through a cafeteria plan. However, we would caution employers who take this approach that there is
uncertainty in the law and that this approach is subject to change. It should be kept in mind that this issue only affects the tax treatment of premiums for employees. Employer payments are always deductible as a necessary business expense.

Do Employer Contributions to Premium Costs Make the Plan Subject to ERISA?
Most commentators have always agreed that Employer contributions to premium costs make these ERISA group health plans. This has not been changed by the ACA. However, complying with these ERISA requirements are, in most cases vastly simplified by the ACA. A good TPA or other compliance consultant should be able to help you avoid any compliance issues.

What Restrictions Were Placed on Health Flexible Spending Accounts (Health FSAs)? A “stand-alone”
Health FSA will not satisfy the ACA requirement that group health plans provide preventive services without imposing any cost-sharing requirements. A Health FSA is not a “stand-along” plan if the employer makes available group health plan coverage. One solution to this problem is to encourage employees to purchase individual High Deductible Health Plans on a private marketplace in order to utilize Health Savings Accounts, which are exempted from this requirement.

The second solution is for the employer to sponsor a “skinny” group major medical plan that offers minimal benefits. Because a group health plan is “available” to employees, even if they waive coverage, the Health FSA would no longer be a “stand-alone” plan and would satisfy the requirements of the ACA.

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This review is intended primarily to be a brief discussion of the impact of IRS Notice 2013-54 on Health Reimbursement Accounts and Cafeteria Plans. It is not intended to be legal, accounting, tax return preparation or other professional advice. Advantage Administrators assumes no liability whatsoever in connection with the use of these comments, nor are these comments directed to specific situations. Employers and brokers are encouraged to discuss strategies for compliance with the Affordable Care Act with their own legal counsel and other advisors.