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IRS Issues Additional Affordable Care Act Guidance for Group Health Plans

November 14, 2013

The Internal Revenue Service (IRS) recently issued Notice 2013-54 which addresses the impact of the Affordable Care Act’s (Act’s) preventive care coverage requirement and prohibition on annual dollar limits on certain employer-sponsored health plans, including health reimbursement arrangements (HRA). An HRA is a health plan funded solely by the employer that reimburses an employee on a tax-free basis for medical care expenses incurred by the employee, his/her spouse, and/or his/her dependents up to a maximum dollar amount per year. Employers should review IRS Notice 2013-54 to determine what impact, if any, it has on their plans. The IRS guidance applies for plan years beginning on or after January 1, 2014.

It is important to keep in mind that the Act’s requirements generally do not apply to "excepted benefits" (e.g., certain limited-scope vision or dental coverage) or arrangements in which fewer than two employees participate on the first day of the plan year. For example, they do not apply to retiree-only arrangements.

Here is a summary of the key issues in the IRS guidance:

  • An HRA can no longer be used to purchase an individual health insurance policy because it will fail the Act’s preventive care coverage requirement and annual dollar limit prohibition. It is not yet clear whether this prohibition would extend to an employer’s reimbursement of an employee’s individual policy premiums under an employment agreement.
  • For the same reasons, an employer cannot allow an employee to make a choice between taxable wages and a pre-tax amount used to pay for an individual health insurance policy. Consequently, employers should review their cafeteria plan documents to make sure coverage under an individual policy is removed as a permitted benefit.
  • An HRA will be impermissible unless it is "integrated" with major medical plan coverage that satisfies the applicable Act requirements. These requirements differ depending upon whether the applicable major medical plan offers "minimum value" coverage as determined under the Internal Revenue Code. Most major medical plans will, indeed, offer minimum value coverage. In that case, the HRA will be integrated with the major medical plan if (1) the employee enrolled in the HRA is also enrolled in a group health plan that provides minimum value (even if that plan is sponsored by another employer), (2) the HRA is available only to employees who are actually enrolled in minimum value major medical coverage, and (3) under the terms of the HRA, an 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.
  • The IRS clarified that an employer’s health care flexible spending account (FSA) arrangement generally will qualify as "excepted benefits" (and thus will be exempt from most of the Act’s requirements) for employees only if (1) the maximum benefit to the employees under the FSA cannot exceed two times the salary reduction election for the year (or, if greater, cannot exceed $500 plus the amount of the salary reduction election), and (2) major medical plan coverage is available to the employees from the employer.
  • An employee assistance program (EAP) will qualify as "excepted benefits" only if it does not provide significant benefits in the nature of medical care or treatment. Until further rulemaking is finalized, an employer may use a reasonable, good-faith interpretation of whether its EAP qualifies.

If you have any questions regarding these issues, please contact a member of Godfrey & Kahn’s Employee Benefits Team.

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