Stand-Alone HRAs and Employer Payment Plans bite the dust

Does EBSA’s (Employee Benefits Security Administration) 9/13/2013 Technical Release No. 2013-03 spell doom for stand-alone HRAs (Health Reimbursement Arrangement) and Employer Payment Plans? It appears so.  HRAs and FSAs have long been used when integrated with a group plan, and will continue to be useful in that regard.

VOCABULARY
HRA:
 A Health Reimbursement Arrangement allows Employers to offer a defined contribution health plan in which they make available monthly contributions (“allowances”) that employees choose how to spend on their eligible healthcare related expenses.
FSA: A Flexible Savings Arrangement is set up through your employer to pay for many of your out-of-pocket medical expenses with tax-free dollars. These expenses include insurance copayments and deductibles, and qualified prescription drugs, insulin and medical devices. You decide how much of your pre-tax wages you want taken out of your paycheck and put into an FSA.
EPP: Employer Payment Plans allow the employer to reimburse an employee’s premiums for their individual health insurance, and payments are excluded from the employee’s gross income under Code §106.
Premium assistance, also called Advance Premium Tax Credit, helps folks pay for health insurance purchased through their state Health Benefit Marketplace, depending on household income. By the way, a married couple must file a jointly for their 2014 federal return in order to be eligible for premium assistance.

What’s the deal with stand-alone HRAs and EPPs? 

Some employers want to contribute toward employee health insurance coverage but without starting a bona-fide group health plan. The reasons vary; HRAs are very flexible in the plan design, enabling varying benefits for different job classifications. For example, part time staff could receive a $100/mo HRA allowance, and management could receive $1,000/mo. An HRA and EPP gives both employers and employees a tax break.

Previously, it looked like a stand-alone HRA or Employer Payment Plan would allow employees to remain eligible for premium assistance if they used HRA or EPP funds to purchase health insurance through Covered California. But the guidance makes clear that these tax-favored plans are indeed considered employer-sponsored plans with minimum essential coverage, and, as described below, renders employees and their families ineligible for premium assistance.

SITUATIONS UNDER WHICH EMPLOYEES & THEIR FAMILIES CAN BE RENDERED INELIGIBLE FOR PREMIUM ASSISTANCE

  1. If the employee is eligible for group coverage that is both affordable and provides minimum value, generally neither the employee nor any related person in the household will qualify for premium assistance. Whether the employee enrolls or not makes no difference. This means that even if the employer contributes nothing towards cost of spouse, partner, or dependent coverage, no one in the family will likely receive premium assistance. Each individual may be eligible, however, for free coverage through Medi-Cal, based on income.
  2. Even if a plan does not have minimum value or otherwise conform to the requirement of the Affordable Care Act, such as a stand alone HRA or EPP,  the employee & family can be excluded from receiving premium assistance if the employee enrolls. From the guidance, “For purposes of the premium tax credit, the requirements of affordability and minimum value do not apply if an employee enrolls in any employer-sponsored minimum essential coverage, including coverage provided through an employer payment plan, a health FSA, or an HRA, but only if the coverage offered does not consist solely of excepted benefits.”The key term is “enrolls.” In other words, if an employee chooses to enroll in a stand-alone HRA or Employer Payment Plan, no premium assistance is allowed for the employee and any related  individual. The  phrase about excepted benefits means that if an employee enrolls in a dental or vision plan, that kind of coverage won’t prevent the employee or family from receiving premium assistance if they otherwise qualify based on their household income. See definition of excepted benefits below.

To wit, again quoting from the guidance, “Coverage provided through Code § 125 plans, employer payment plans, health FSAs, and HRAs are eligible employer-sponsored plans and, therefore, are minimum essential coverage, unless the coverage consists solely of excepted benefits. See Code § 5000A(f)(2) and Treas. Reg. §1.5000A-2, 78 Fed. Reg. 53646, 53658 (August 30, 2013).

What is minimum essential coverage?

In a walnut nutshell, it means government-sponsored coverage like Medicare, employer-sponsored group health plans, and individual & family health plans. To read it from the horse’s mouth, search for the term “Sec.  1.5000A-2  Minimum essential coverage” in the Federal Register at http://1.usa.gov/1by7kdX. HealthCare.gov’s glossary definition is: “The type of coverage an individual needs to have to meet the individual responsibility requirement under the Affordable Care Act. This includes individual market policies, job-based coverage, Medicare, Medicaid, CHIP, TRICARE and certain other coverage.”

What is  minimum value?

A health plan has minimum value if it is designed to pay at least 60% of the total cost of medical services for a standard population. Starting in 2014, individuals offered employer-sponsored coverage that provides minimum value and that’s affordable won’t be eligible for a premium assistance. All plans in the group and individual & family marketplace must be have both minimum value and Essential Health Benefits.

What’s an excepted benefit?

In a southern pecan nutshell, it means insurance like auto, dental, vision, liability, critical illness, long-term care, and indemnity. Read this United States Code (USC) yourself in all it’s legal glory at http://www.law.cornell.edu/uscode/text/42/300gg-91.

 Summary

Employers wanting to help their W-2 employees pay for health insurance can:

  1. Let employees pay for it themselves. You could consider giving a raise on a case by case basis. Unfortunately paycheck income is not excluded from income or payroll tax, nor will the employer be eligible for the Business Tax Credit that’s available to nonprofits. But employees & their families will be eligible for premium assistance on the Covered California exchange, based on household income.
  2. Implement a group plan for W-2 employees.  Contribute towards dependent coverage if you are concerned that by offering group coverage you automatically eliminate the employee’s family from premium assistance, whether the employee enrolls or not.  Employer contributions are excluded from income and payroll taxes. The employer may qualify for the Business Tax Credit. Everyone wins.

Artist Insurance Services. Los Angeles, CA 90008. Michael Grodsky, Principal. phone 323-293-6800

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Michael Grodsky

Michael Grodsky, is owner of Aquarius Insurance Services and Aquarius Financial.