HRA Changes for 2014

Health Reimbursement Arrangements (HRA) are employer-funded arrangements that reimburse employees for certain medical expenses on a tax-free basis, up to a maximum dollar amount for a coverage period. In general, the rules surrounding HRAs have been less strict than for other types of tax-advantaged medical savings accounts, providing employers with flexibility in designing their HRAs.

The Internal Revenue Service (IRS) and the Department of Labor (DOL) issued technical guidance on how the Affordable Care Act’s (ACA) reforms apply to HRAs with IRS Notice 2013-54 and DOL Technical Release 2013-03. It applies for plan years beginning on or after January 1, 2014, but can be applied for all prior periods.

Effective for plan years beginning on or after January 1, 2014, whether an HRA will be permitted mainly depends on whether the HRA is integrated with other group health coverage or a stand-alone HRA.

The IRS and DOL’s guidance includes two ways for an HRA to be considered integrated with another group health plan. The agencies’ guidance also confirms that an HRA used to purchase coverage on the individual market cannot be integrated with that individual market coverage. Thus, HRAs cannot be used to purchase health coverage on the individual market for employees.

In addition, retiree-only HRAs are exempt from the ACA’s market reforms. These types of stand-alone HRAs will continue to be available for 2014 and later years.

Integrated HRAs

An HRA that is integrated with a group health plan will comply with the ACA’s annual limit prohibition and preventive care requirements if the group health plan with which the HRA is integrated complies with the ACA requirements.  An HRA will be integrated with a group health plan for purposes of the ACA’s annual dollar limit prohibition and prevent care requirements if it meets the requirements under one of the integration methods described below.

Under both methods, integration does not require that the HRA and the coverage with which it is integrated share the same plan sponsor, the same plan document or governing instruments or file a single Form 5500, if applicable.

Method One:  Limiting Reimbursements, Minimum Value Not Required

An HRA is integrated with group health coverage if the following conditions are satisfied:

  • The employer offers a group health plan (other than the HRA) to employees that does not consist solely of excepted benefits;
  • Employees with the HRA are actually enrolled in a group health plan (other than the HRA) that does not consist solely of excepted benefits, regardless of whether the employer sponsors the plan (non-HRA group coverage);
  • The HRA is available only to employees who are enrolled in non-HRA group coverage, regardless of whether the employer sponsors the non-HRA group coverage (for example, the 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 coverage, such as a plan maintained by the employer of the employee’s spouse);
  • Under the terms of the HRA, an employee (or former employee) is 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; and
  • The HRA is limited to reimbursement of one or more of the following—copayments, coinsurance, deductibles and premiums under non-HRA group coverage, as well as medical care that does not constitute essential health benefits.

Method Two:  Minimum Value Required, No Limit on Reimbursements

Alternatively, an HRA that is not limited with respect to reimbursements as described above is integrated with group health coverage if the following conditions are satisfied:

  • The employer offers a group health plan to employees that provides minimum value under the ACA;
  • Employees with the HRA are actually enrolled in a group health plan that provides minimum value,  regardless of whether the employer sponsors the plan (non-HRA group coverage);
  • The HRA is available only to employees who are enrolled in non-HRA minimum value group coverage, regardless of whether the employer sponsors the non-HRA minimum value group coverage (for example, the 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 minimum value group coverage, such as a plan maintained by the employer of the employee’s spouse); and
  • Under the terms of the HRA, an employee (or former employee) is 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.

Stand-Alone HRAs

Stand-alone HRAs will not be able to satisfy the ACA’s annual limit and preventive care reforms on their own and, thus, will no longer be available.  A set of frequently asked questions from January 2013 addressed how amounts that are credited or made available under HRAs under terms in effect prior to January 1, 2014, will be treated.

The FAQs anticipated that future ACA guidance would provide that, whether or not an HRA is integrated with other group health plan coverage, unused amounts credited before January 1, 2014 (consisting of amounts credited before January 1, 2013, and amounts that are credited in 2013 under the terms of an HRA as in effect on January 1, 2013), may be used after December 31, 2013, to reimburse medical expenses without violating the ACA’s annual limit requirements. However, if the HRA terms in effect on January 1, 2013, did not prescribe a set amount to be credited during 2013 or the timing for crediting these amounts, then the amounts credited may not exceed those credited for 2012 and may not be credited at a faster rate than the rate that applied during 2012.

The IRS and DOL’s guidance from September 13, 2013 does not address this transition relief, making it unclear whether employers can rely on it for 2014.