August 25, 2019

August 23, 2019

Subscribe to Latest Legal News and Analysis

August 22, 2019

Subscribe to Latest Legal News and Analysis

IRS Notice 2015-87 (Part 1) – IRS Issues New HRA Integration Rules

On December 16, 2015, the Internal Revenue Service issued Notice 2015-87 containing guidance on a wide-range of topics under the Affordable Care Act (ACA). In addition to providing guidance on affordability and COBRA matters (which will be described in subsequent posts), Notice 2015-87 builds upon prior guidance to regulate further the use of health reimbursement arrangements to reimburse premiums paid for individual market premiums.

By way of background, as described in IRS Notices 2013-54 and 2015-17, the IRS considers arrangements whereby employers reimburse employees (whether on a pre-tax or after-tax basis) for medical-related costs (including premiums) to be group health plans subject to the ACA’s market reforms. The problem is that, by their very nature, these health reimbursement arrangements (HRAs) and premium payment plans cannot on their own satisfy certain market reforms, such as the required coverage of preventive services or prohibition on annual limits. Therefore, in order for HRAs to be ACA compliant, they must be “integrated” with a group health plan that meets the ACA’s market reforms. Although the IRS allows an HRA to be integrated with a group health plan, including a group health plan not sponsored by the employer sponsoring the HRA, the IRS has unequivocally stated that an HRA cannot be integrated with an individual market plan (subject to the few exceptions described below).

The IRS has already declared after-tax reimbursements for individual market insurance premiums impermissible and has provided guidance on integration with group health plans, Medicare and TRICARE. With Notice 2015-87, the IRS now provides the following additional guidance related to HRAs:

  • Notice 2015-87 reaffirms that HRAs limited to retirees may reimburse individual market insurance premiums (including Medicare supplement plans) and other medical-related costs. The rationale for this exception is that the Internal Revenue Code and ERISA contain a “retiree-only exception,” stating that plans that cover less than two active employees are excepted plans that are not required to comply with the market reforms. This guidance is helpful given the current trend to replace traditional retiree group health plans with HRAs tied private individual insurance marketplaces.

  • Unless the retiree-only exception applies, unused amounts in an HRA cannot be used to reimburse premiums paid by former employees for individual market coverage even if the amounts were originally earned in the HRA when the HRA was properly integrated with a group health plan.       To allow for post-termination reimbursements, an employer could presumably establish a separate payment plan or HRA program covering only former employees and credit this new HRA with the amount of the unused balance from the existing HRA for active employees.

  • The IRS reiterated statements in prior guidance that amounts credited to an HRA before 2014 may be used to reimburse medical expenses pursuant to the terms in effect before 2014 without violating the ACA market reforms.

  • An HRA that reimburses medical expenses for an employee and the employee’s spouse and dependents cannot be integrated with self-only group health plan coverage provided by the employer. However, the IRS will not enforce this requirement until 2017.

Thus, starting in 2017, an HRA generally cannot reimburse medical expenses for a spouse or dependent not covered by the group health plan coverage sponsored by the employer. However, given that Notice 2013-54 clearly contemplates that an employee’s HRA can be integrated with a group health plan sponsored by his or her spouse’s employer, one would imagine that the HRA could still reimburse that spouse or dependent if he or she was covered by another group health plan (even if not one sponsored by the participant’s employer).

  • An HRA that reimburses an employee for premiums paid for individual market coverage will not result in a violation of the ACA market reforms if the coverage solely provides excepted benefits. Thus, for example, an HRA could reimburse premiums for individual market dental or vision benefits.

  • An employer payment plan or HRA that is part of a cafeteria plan established under Section 125 of the Internal Revenue Code must be integrated with a group health plan to be ACA compliant. Some benefits consultants have advised that employers may reimburse employees for individual market premiums if the reimbursement is funded with employee salary deferrals or employer flex credits made to a cafeteria plan. Notice 2015-87 effectively ends this practice.

  • In order to be compliant with the ACA’s market reforms, an HRA apparently must be in both documentary and operational compliance. For example, it is not enough that the HRA not actually reimburse employees for medical coverage purchased on the individual market. Instead, the terms of the HRA must explicitly state that individual insurance reimbursements are not permitted.

Considering the guidance issued over the past few years with respect to HRAs, and Notice 2015-87’s apparent documentary compliance requirements, employers should review their HRA documentation to assess compliance with the ACA. Given the potential pitfalls, employers considering establishing an HRA should proceed carefully and consult with counsel. Additional blogs covering Notice 2015-87’s other guidance will be forthcoming in the next few days.

© 2019 Proskauer Rose LLP.

TRENDING LEGAL ANALYSIS


About this Author

Robert M Projansky, Employee Attorney, Proskauer Rose Law FIrm
Partner

Robert M. Projansky is a Partner in the Employee Benefits, Executive Compensation & ERISA Litigation Practice Center. His practice covers the full spectrum of employee benefit issues, including advising clients regarding all aspects of pension and welfare plan administration, plan investment issues, health care reform, mergers and terminations, government audits, participant communications, fiduciary responsibility matters and prohibited transactions issues.

212-969-3367
Damian A Myers Labor and employment law attorney proskauer rose
Senior Counsel

Damian Myers is an Associate in the Employee Benefits, Executive Compensation and ERISA Litigation Practice Center, resident in the Washington, DC office.

Damian represents public and private companies on matters related to employee benefits and executive compensation including compliance with ERISA, tax, corporate and securities laws and regulations affecting employee benefit plans, programs and arrangements. He concentrates on all aspects of compensation and employee benefit programs, including the design, implementation, administration and funding of non-qualified retirement plans, equity based compensation plans and executive compensation arrangements. Additionally, Damian assists clients with planning and compliance matters related to the Patient Protection and Affordable Care Act of 2010 (Health Care Reform). 

202-416-6877