A number of folks have asked to learn more about post-Affordable Care Act rules about other types of health reimbursement arrangements, known as HRAs, following my June 26 post on employer reimbursements for health coverage on the public exchanges.
The distinct types of HRAs that are allowed moving forward are: integrated HRAs, spousal coverage reimbursement HRAs and retiree-only reimbursement plans. Heres more on each of them.
These plans were specifically raised in IRS Notice 2013-54 as a means for payment of certain benefits which are coordinated, or integrated, with a group health plan if that other coverage alone complies with the preventive services requirements and other requirements of the ACA.
There are some rules, too, that accompany integrated HRAs:
- Employer offers, in addition to the integrated HRA, a group health plan to its employees that does not consist solely of excepted benefits;
- Employee who participates in the HRA is also enrolled in the employers group health plan;
- HRA is limited to reimbursement of copayments, coinsurance, and deductibles from the group health plans, as well as medical care that is not essential health benefits; and
- The HRA permits an employee to permanently opt out and waive future reimbursements from the HRA at least annually.
To most folks in our business, the integrated HRA is the traditional way that HRAs have been used to combine an insured group health plan with an employer-paid source to reimburse certain health plan-related cost-sharing (deductibles most often). The history of these HRAs goes back to 2002 and even further back to the creation of Employer Payment Plans in 1961 and Internal Revenue Code Section 105s medical expense reimbursement plans.
These integrated HRAs will, I believe, remain a critical element for many small and mid-sized employers to manage the cost of health care between premiums and total cost of providing coverage to their employees. But abuse of this model will undoubtedly result in more scrutiny and regulation if agents arent careful.
There are two what Ill call exception to the exception premium reimbursement HRAs still permitted after IRS Notice 2013, which Ill discuss now.
Spousal coverage reimbursement HRAs
This HRA allows for an employee to be reimbursed for coverage on their spouses group health plan if that group health plan meets the requirements under the ACA. Note that reimbursing an employee for coverage on their spouses individual health insurance plan is not permitted under this approach.
With so much discussion around spousal participation, contribution and eligibility rules, the use of this type of reimbursement HRA may have limited use, but weve already seen instances where it can assist an employer and the employee in many positive ways. But there are landmines for the employee if not properly informed about the tax consequences of this type of HRA which is best illustrated by an example:
Bobs Fresh Fruit reimburses one of its employees, John, for the cost of health coverage that he has through his wifes (Sally) employer using the spousal coverage reimbursement HRA. The amount that Bobs Fresh Fruit reimburses is based on the information received from Sallys employer on the cost between covering the employee only and covering herself and her spouse.
For the purpose of this example, lets say that the cost for employee-only coverage for Sally and other employees is $20 per month, but to cover John, Sally would have to pay an additional $240 per month. So, Bobs Fresh Fruit reimburses John $240 each month for the cost of spousal coverage, which is not considered taxable income to John.
But when Sally pays $240 each month to cover John, shes probably doing so using a premium conversion plan which allows her to pay the $240 on a pre-tax basis. So there may be a tax issue for John and Sally when they pay their income taxes annually since theyve been reimbursed for an amount paid on a pre-tax basis creating a double pre-tax event that could result in an audit issue in the future.
So when reimbursing an employee for spousal group coverage, it is very important that the employer also inform the employee of the need to seek tax advice about the proper way to treat the reimbursement in light of these pre-tax issues.
Retiree-only reimbursement plans
These are also explicitly permitted, but obviously their use is very limited to non-active employees. Therefore, retirees covered in a retiree-only HRA satisfy the ACAs individual mandate (requiring most Americans to have health insurance) and are not subject to the individual mandate penalty.
The retiree-only reimbursement plan can reimburse retirees who are not yet eligible for Medicare and purchase coverage either on or off the federally-facilitated marketplace or a state-based exchange.
One key point: Anyone reimbursed for coverage through a retiree-only HRA is not eligible for premium tax credits (federal assistance for lower-income individuals) or cost-sharing assistance for coverage they might select through the marketplace.
Many employers particularly governmental entities have permitted pre-65-year-old retirees to remain on their group health plans until they become eligible for Medicare. But the long-term cost of covering these individuals has been very high and also unpredictable, and governmental accounting standards are requiring these employers to account for this liability as an ongoing obligation to avoid these folks being left without coverage in the future.
The retiree-only reimbursement plan allows the employer to predict the actual cost annually for covering their employees and to eliminate the uncertainty of these older individuals impacting the cost of their health plan directly (if self-funded) or indirectly (through higher risk rating for health insurance if more than 50 employees).
This same mechanism can be used to reimburse retirees who are enrolled in Medicare for their premiums for Medicare supplemental plans, Part B and Part D prescription drug plans, or Medicare Advantage premiums. Employers should take care to not use the retiree-only HRA for active full-time employees since, in nearly every situation, the employer would be violating Medicare Secondary Payer rules by creating an incentive for the employee to be covered on Medicare instead of the group health plan.
At the end of the day, the agencies responsible for implementing the ACA have tried to strike a balance between the premium subsidy programs available for many lower-income individuals and employer reimbursement of health premiums.
These aforementioned three types of HRAs will not violate the large rules discussed last month and still permit employers to provide options to offer coverage and manage costs for their employees and retirees in the future.
Smith is vice president of EbenConcepts Company, and a recovering attorney. Reach him at email@example.com.
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