Toward the end of 2013 I wrote two columns concerning Health Reimbursement Arrangements (HRAs) and Health Flexible Spending Accounts (FSAs) and how the Affordable Care Act (ACA) and Notice 2013-54 changed the rules that employers must follow.
So far during 2014 I have spoken with myriad employers that did not know changes needed to be made to their benefits plans or didn’t fully understand how to implement the changes. Enrollment season is just around the corner, so I thought I would repeat, in a condensed manner, the 2014 rules for health FSAs offered through cafeteria plans and a reminder about permissible HRAs.
Health FSAs
Health FSAs must be designed to be considered an “excepted benefit.” This is not a new rule that just started in 2014; there is a HIPAA excepted benefit rule that has been in place for many years. If the health FSA was an excepted benefit under the HIPAA certification requirement and the employer offered a group health insurance plan, the health FSA could then be exempt from offering COBRA if the health FSA was overspent.
There are just two rules to follow in order to offer health FSAs: 1) Employees must be eligible for employer-sponsored ACA-compliant group health plan coverage, and 2) employer contributions to the health FSA are limited to $500 or equal to the participant’s election, if greater.
Here’s an example of employer contributions to the health FSA that meet the maximum benefit condition:
• A one-for-one employer match. (Em-
ployer $600, employee $600.)
• An employer contribution of $500 or less. (Employer $500, employee $200.)
These scenarios do not meet the maximum benefit condition:
• Employer contributes more than $500, if employee contributes $500 or less. (Employee election $400 and employer contribution $600.)
• Employer contribution in excess of one-to-one match, if employee contributes more than $500. (Employer contributes $700, employee contributes $600.)
If the health FSA only allows for employee salary reduction contributions, then the only rule to consider is whether each participant in the health FSA is also eligible for the employer’s ACA-compliant group health plan.
ACA rules for health FSAs include a requirement that over-the-counter drugs and medications be prescribed by a physician in order to be reimbursable and the health FSA must be limited to $2,500 for any cafeteria plan year. If the cafeteria plan is running on a short plan year, the $2,500 is prorated for each month in the short plan year.
Limited-purpose health FSAs may also be offered, perhaps in conjunction with HSAs, that provide for just vision and dental expenses. Vision and dental expense reimbursement plans are excepted benefits.
HRAs
Starting on January 1, 2014, HRAs must be “integrated” in order to offer reimbursement of all medical, dental and vision expenses. Acceptable integration methods are divided into two categories: 1) Minimum Value (MV) method, and 2) MV not required method.
Both methods require:
• HRA participants must be eligible for and participate in an employer-sponsored ACA-compliant group health plan. (An HRA cannot be integrated with individual policies.)
• Employees may certify coverage under spouses’ ACA-compliant group health plan.
• Participants must have the option, annually, to permanently opt out and waive future reimbursements.
• HRAs should forfeit remaining balances upon termination to allow marketplace tax credits.
In addition, the MV method requires underlying group health plans to provide MV and that HRA benefits be available for all or a subset of IRS Code Section 213(d) eligible medical expenses and premiums for employer-sponsored group health plans. The MV not required method requires HRA benefits to be limited to co-payments, co-insurance, deductibles and premiums for group health plans and IRS 213(d) eligible medical expenses that do not constitute essential health benefits covered by the other group health plan.
Retiree HRAs and HRAs that provide excepted benefits such as vision and dental expenses may continue to be utilized by employers and do not have to meet the conditions noted above.
HRAs that cannot continue include non-integrated arrangements and HRAs that are integrated with individual insurance policies or that pay premiums for individual health insurance policies. These types of plans are not ACA compliant and carry a stiff penalty of $100 per day, per participant for every day they are in existence. That’s $36,500 per year due for each and every participant in a non-compliant plan.
There is, however, a transition period for ineligible HRAs that were in place as of January 1, 2013. Balances as of December 31, 2013, are frozen (that is, no additional funds may be added) and unused funds may be “spent down.” There is no time limit on the spend-down transition and it can also be utilized for participants who terminate employment.
Both health FSA and HRA waiting periods need to be coordinated with employer-sponsored group health plans. Make sure that both health FSA and HRA waiting periods are not shorter than the group health plan waiting period. ACA-compliant group health plans generally have a maximum 90-day waiting period prior to enrollment. Have employers check both plan documents to ensure that employees are not eligible for health FSAs prior to being eligible for group health insurance plans.
Last note: Don’t forget about the latest, greatest feature for health FSAs—carry over. Up to $500 of unused health FSA funds may be carried forward from one year to the next. Employers need to update their plan document before the end of their current plan year in order for employees to take advantage of this great benefit.
Check with your employers on all these important points and start out 2015 with appropriate, compliant flexible benefits.
No information contained herein is intended to be legal, accounting or other professional advice. We assume no liability whatsoever in connection with your use of or reliance upon this information. This information does not address specific situations. If you have questions about your specific situation, we recommend that you obtain independent professional advice.
