Health reform prohibits most reimbursement plans

The many small businesses that had for decades relied on freestanding health reimbursement arrangements (HRAs) or employer payment plans (EPPs) under Rev. Rul. 61-146 to provide health care benefits for employees may no longer do so in most cases because of the “market reform” provisions of the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148.

Notice 2015-17 provided additional time this year for companies to retool HRAs. However, the notice’s relief for EPPs expired on June 30, except for S corporation 2% shareholder-employees, for whom it continues through 2015, with further guidance expected this year.

The market reform provisions prohibited annual limits on the dollar value of health benefits under group health plans. Therefore, employer group plans that provide an annual maximum amount of payment or reimbursement generally fail that provision. However, PPACA allows such plans to be integrated with an employer-sponsored health plan that does comply with the market reform provisions. The market reform provisions also generally require group health plans to provide certain preventive services without any cost-sharing requirements. The provisions do not apply to accident-only coverage, limited-scope dental and vision benefits, and other “excepted” benefits provided in a group health plan.

In Notice 2013-54, issued in September 2013, the IRS clarified that all pretax EPPs are considered to be group health plans subject to the PPACA market reforms. A wide range of tax-advantaged arrangements to pay premiums are now categorized as EPPs. All HRAs or plans for the direct payment of health insurance that were previously allowed under Rev. Rul. 61-146, Sec. 105, Sec. 106, and Sec. 125 are affected. Such reimbursement arrangements cannot be integrated with individual policies to meet market reform requirements and therefore may be subject to a $100-per-day excise tax per employee (with very limited exceptions) under Sec. 4980D.

WHAT’S WRONG WITH A CAFETERIA PLAN?

Cafeteria plans allow employees to pay, on a pretax basis, for individual health insurance premiums not otherwise paid for by their employer. The IRS treats these salary reduction contributions as employer contributions excluded from income under Sec. 106. Thus, because the employee contributions are treated as employer contributions, the cafeteria plan is considered a group health plan subject to the market reform provisions, and, as such, the plan must provide preventive services without cost sharing in all instances. Presumably, under Notice 2013-54, a cafeteria plan would fail this preventive services requirement.

WHAT HEALTH REIMBURSEMENT PLANS ARE ACCEPTABLE?

• Health flexible savings accounts (FSAs) offered as part of a cafeteria plan. A health FSA is an excepted benefit only if the employer offers to employees other group health plan coverage not limited to excepted benefits for the year and the health FSA is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the arrangement for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election). Thus, the employer contributions to the health FSA must be under $500 or not more than a 100% match of employee contributions.
• HRAs integrated with a group health plan that complies with the annual-dollar-limit prohibition and the preventive services requirements.

By the new definition, individual health policies will cause any reimbursement or pretax plan to fail the new requirement.

HOW IS AN HRA INTEGRATED WITH A COMPLIANT GROUP HEALTH PLAN?

Under Notice 2013-54, an HRA will be integrated with a group health plan for purposes of the annual-dollar-limit prohibition and the preventive services requirements if it meets the requirements of one of two integration methods. Under either method, the HRA and the plan do not have to have the same sponsor, plan document, or governing instruments, or have to file a single Form 5500, Annual Return/Report of Employee Benefit Plan, to be integrated. The integration method used depends on whether the group health plan provides minimum value (as defined in Sec. 36B).

1. If the group health plan does not provide minimum value,

• The employer must offer a group health plan to the employee that does not consist solely of excepted benefits;
• The employee receiving the HRA must actually be enrolled in a group health plan that does not consist solely of excepted benefits;
• The HRA must be available only to employees who are enrolled in non-HRA group coverage;
• The HRA must be limited to reimbursement of co-payments, co-insurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care (as defined under Sec. 213(d)) that does not constitute essential health benefits; and
• Under the terms of the HRA, an employee (or former employee) must be permitted to permanently opt out of and waive future reimbursements from the HRA at least annually and, upon termination of employment, either the remaining amounts in the HRA are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA.

2. If the group health plan does provide minimum value (the plan’s share of the total allowed cost of benefits is at least 60% of those costs),

• The employee receiving the HRA must be actually enrolled in a group health plan that provides minimum value;
• The HRA must be available only to employees who are actually enrolled in non-HRA minimum-value group coverage; and
• Under the terms of the HRA, an employee (or former employee) must be permitted to permanently opt out of and waive future reimbursements from the HRA at least annually, and, upon termination of employment, either the remaining amounts in the HRA are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA.

Both methods allow the integrated group health plan requirement to be satisfied by a different employer. For instance, an HRA may be offered only to employees who do not enroll in the employer’s group health plan but are enrolled in other non-HRA group coverages, such as a plan maintained by the employee’s spouse’s employer.

WHAT ACCOUNT-BASED HEALTH REIMBURSEMENT PLANS COULD TRIGGER THE EXCISE TAX?

• Stand-alone HRAs;
• Employer payment plans;
• Cafeteria plans reimbursing premiums for individual health coverage with employer contributions if the employer is not participating in a Small Business Health Options Program (SHOP) Marketplace plan;
• Health FSAs with employer contributions in excess of the annual dollar limit;
• HRAs used to reimburse only dental or vision expenses with no requirement that the participant enroll in a group health plan (however, dental and vision care provided under a separate policy are excepted benefits);
• Premium-only plans for individual coverage;
• Medicare premium reimbursement arrangements; and
• TRICARE premium reimbursement arrangements.

If an employer does not provide a group health plan but still wishes to help with the cost of an employee’s individual health insurance premiums, it must do so on an after-tax basis. Employers are allowed to establish payroll practices to forward post-tax employee wages to a health insurance issuer at the direction of the employee.

WHAT IF AN EMPLOYER HAS AN EXISTING, NONINTEGRATED PLAN?

If the existing plan is not integrated, or the EPP otherwise fails to meet the PPACA requirements, it must be spent down until there is no balance, amended to comply with the requirements, or terminated.

WHAT ABOUT S CORPORATION SHAREHOLDERS?

The relief offered by Notice 2015-17 has expired for all employees except shareholders who own more than 2% of an S corporation. The IRS will issue further guidance on the application of market reforms to 2% shareholders. Until then, or at least through the end of 2015, 2% shareholders may continue reporting direct payments of reimbursements as salary subject to income tax (but not FICA) and to take an above-the-line deduction for health insurance premiums as they have in the past.

WHAT ABOUT SINGLE-EMPLOYEE PLANS?

Sec. 9831 carves out an exception for a group health plan with fewer than two participants who are current employees. Therefore, an arrangement that benefits a single employee or an arrangement that benefits only retired employees is not subject to market reforms, whether or not a reimbursement arrangement exists. Notice 2015-17 allows more than one individual to be covered under a plan, as long as all covered individuals are the spouse or dependents of the single plan participant.

Practitioners should exercise care, however. If an S corporation maintains more than one reimbursement arrangement for different employees (whether or not they are 2% shareholders), all the arrangements are treated as a single plan, which could subject the company to the excise tax penalty. For example, if an S corporation reimburses both a 2% shareholder and a non-2% shareholder, the arrangement is considered to be a group health plan. S corporations and their advisers should watch for further guidance.

On June 17, the AICPA delivered a letter urging Congress to amend PPACA to allow HRAs and similar arrangements as previously (the letter is available at aicpa.org. Whether Congress is able to do so—or the IRS can continue to exempt S corporation shareholders absent statutory authority—remains to be seen. In the meantime, CPAs and their small business clients should review such arrangements for compliance with the new rules.

Dayna Roane (dayna@perryco.com) is a shareholder with Perry & Roane PC, Niwot, Colo.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at pbonner@aicpa.org or 919-402-4434.