PPACA guidance clarifies rules for HRAs, health FSAs, and other accountable plans.

• Author: Creech, Catherine
• Position: Patient Protection and Affordable Care Act, health and flexible spending arrangements

In Notice 2013-54, the IRS provided long-anticipated guidance on when employers may use arrangements such as a health reimbursement arrangement (HRA) or a health flexible spending arrangement (health FSA) to provide employees with a fixed amount to pay for health care premiums and other eligible medical expenses.

In an effort to manage health care costs and provide employees with a choice of health care options, employers increasingly are considering plan designs that provide employees with a fixed amount that may be used at the employee's discretion either to purchase coverage or to reimburse medical care expenses. Notice 2013-54 sets parameters for when this type of fixed-dollar arrangement complies with the health care market reform provisions of the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, and therefore is a permissible employee benefit program. Generally, the notice precludes employers from maintaining an HRA, health FSA, or other type of tax-free reimbursement arrangement that may be used to pay for or reimburse premiums for health insurance on the individual market (including the health care exchanges). Under the guidance, an HRA is viable only if it is integrated with a non-HRA employer-provided group health plan.

Notice 2013-54 also addresses when an employee-assistance program (EAP) is considered an "excepted benefit" and, therefore, is not subject to the PPACA market reform rules. Employers that maintain an EAP may have been concerned that unless an exception was provided, they would need to terminate the program because it would fail to comply with the market reform rules. Notice 2013-54 provides employers with a broad definition of EAPs that are treated as excepted benefits. This guidance should generally be welcomed because it provides for greater flexibility at least through 2014.

The Departments of Labor (DOL) and Health and Human Services (HHS) also issued substantially similar coordinating guidance. (Collectively, Treasury/ IRS, DOL, and HHS are referred to as the Departments.)

Background

The purpose of the notice is to provide additional guidance on the application in 2014 of the PPACA market reform rules and, in particular, the provisions in PPACA providing that a group health plan with two or more active participants must not (1) impose any annual dollar limit on "essential health benefits" or (2) fail to provide certain preventive services without imposing any cost-sharing requirements. These market reform rules arise under the Public Health Service Act (PHSA), as amended by PPACA, and are incorporated into the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. For federal tax purposes, failure to comply with the market reforms results in an excise tax under Sec. 4980D, which is $100 per day per affected participant.

The notice addresses several types of employer medical reimbursement arrangements including HRAs, health FSAs, and employee payment plans under which an employer pays directly or reimburses an employee for premiums for health care coverage purchased in the individual market. The notice also addresses EAPs.

HRAs generally are unfunded arrangements maintained by an employer to reimburse eligible employees' medical expenses, including health care premiums. Under IRS administrative guidance (Notice 2002-45), HRA balances may be carried over from year to year. An HRA is funded exclusively by the employer; it may not use employee salary reduction contributions.

A health FSA is designed to reimburse employees' medical expenses other than health care premiums. A health FSA typically is offered through...