United States: How Will HRAs Be Impacted By PPACA? What Are "Integrated" And "Stand-Alone" HRAs?

In March 2010, President Obama signed into law the most sweeping social policy legislation passed by Congress in decades: the Patient Protection and Affordable Care Act. The main drivers for enacting PPACA were to expand health insurance coverage to as many Americans as possible and to mandate that insurance policies provide comprehensive healthcare coverage. To meet the latter policy goal, the drafters of PPACA required all "group health plans"—both fully insured and self-insured—to meet certain minimum standards beginning in 2014.¹ In addition, Congress required fully insured and self-insured group health plans to make certain plan-design changes in accordance with the so-called "grandfather" rules.² One of the more significant new requirements under the grandfather rules is eliminating annual limits placed on the dollar value of the "essential health benefits."³

Congress also requires employers with 50 or more full-time equivalent employees to offer a group health plan that is Affordable and provides "minimum value" or face a penalty tax under the so-called "employer mandate."⁴ For a plan to be considered affordable, the employee contribution for the lowest cost, self-only group health plan option cannot exceed 9.5% of, for example, the employee's W-2 income.⁵ To meet the minimum-value requirement, the plan must pay for at least 60% of the cost of the benefits provided under the plan.⁶

In the wake of the enactment of PPACA, employers, employee benefit practitioners and other stakeholders such as TPAs have been trying to figure out how the new annual-limit restrictions and the affordability and minimum value tests under the employer mandate will impact a Health Reimbursement Arrangement. This article will examine these issues.

WHAT ARE THE NEW ANNUAL LIMIT RESTRICTIONS?

PPACA added section 2711 to the Public Health Services Act (PHSA), requiring insurance carriers (in the case of individual or fully insured group health insurance coverage) and employers (in the case of a self-insured plan)—for plan years beginning on or after September 23, 2010—to phase out any annual limits imposed on the dollar value of essential health benefits over a three-year period.⁷ For plan years beginning on or after January 1, 2014, no annual limits may be imposed on the dollar value of essential health benefits under an individual health insurance policy or a group health plan (fully insured and self-insured).⁸ On June 28, 2010, the Departments of Health and Human Services, Treasury and Labor (hereinafter referred to as the federal agencies) issued interim final regulations (IFRs) implementing, among other things, new PHSA section 2711.⁹

HOW DO THE ANNUAL LIMIT RESTRICTIONS APPLY TO HRAS?

The federal agencies have indicated that an HRA is considered a group health plan that is subject to the restrictions on annual limits.¹⁰ An HRA, by definition, imposes upper limits on the dollar value of benefits.¹¹ As a result, it appeared that an HRA would, by definition, violate new PHSA section 2711.

The Federal agencies, however, have indicated that an HRA that is "integrated" with an underlying group health plan will generally satisfy the new annual-limit restrictions as long as the underlying health plan meets this new requirement.¹² Important note: The federal agencies were silent on what "integrated" means (i.e., the June 2010 IFR did not provide a specific definition of what would be considered an "integrated" HRA). In addition, the federal agencies were silent on whether a "stand-alone" HRA would violate the annual limit restrictions, although public comments were requested on whether a stand-alone HRA may meet this new requirement.¹³

WHAT IS AN INTEGRATED HRA?

On January 24, 2013, the federal agencies issued a set of FAQs that spoke directly to HRAs and the annual limit restrictions.¹⁴ One FAQ specifically stated that, to be considered an integrated HRA for purposes of the new annual-limit restrictions, an employee receiving employer contributions through the HRA must be "enrolled" in the underlying group health plan that is also being offered to the employee.¹⁵ In other words, if an employee is offered coverage under a group health plan and the employee is also permitted to use employer contributions for certain purposes through an HRA (i.e., the HRA is a component of the health plan), the HRA would be considered integrated with the underlying group health plan only if the employee actually enrolled in the group health plan. Thus, although we expect future guidance in this area, we can surmise that an integrated HRA is an HRA that is offered as a component of a group health plan where the employee actually enrolls in the underlying group health plan.

HOW DO YOU DEFINE "STANDALONE" HRAS AND HOW ARE THEY TREATED UNDER PPACA?

Although stand-alone HRAs have not been specifically defined by the federal agencies, the January 24, 2013 FAQ is illustrative. Tat is, if an employee is permitted to use an HRA that is not a component of a group health plan, it is likely that the HRA will be considered a stand-alone HRA. In addition, even if an employee is permitted to use an HRA that is a component of an HRA, if the employee does not actually enroll in the plan (e.g., the employee waived coverage under the group health plan because he or she received coverage through a spouse), the HRA will likely be considered a standalone HRA.

According to the IFR implementing the annual limit restrictions, it appears that a stand-alone HRA—as compared to an integrated HRA—will violate the new annual-limit-restriction requirement.¹⁶ As a result, if an employer offers a stand-alone HRA to its employees, it appears that the employer will be subject to an excise tax of $100 per day, per violation.¹⁷ This will arguably end the use of stand-alone HRAs.

INTEGRATED HRAS AND THE AFFORDABILITY TEST

On May 2, 2013, the Treasury Department issued proposed regulations that indicate that, for purposes of the affordability test, amounts contributed to an integrated HRA that are earmarked for premiums only or can be used for premiums or cost-sharing may be counted toward satisfying this test.¹⁸ This is significant because these proposed regulations confirm an interpretation of the final premium subsidy regulations that indicated that integrated HRA contributions used to pay for premiums only may be counted toward meeting the affordability test.¹⁹ This rule is also significant because it informs us how contributions to a "mixed" HRA will be counted for purposes of the affordability test along with the minimum-value test.

INTEGRATED HRAS AND THE MINIMUM-VALUE TEST

The recently proposed Treasury regulations also indicate that amounts contributed to an integrated HRA may be counted towards minimum value only if the contribution amounts can be used to pay for the cost sharing of the component group health plan (and cannot be used to pay premiums).²⁰

Unlike the rules relating to HRAs and the affordability test, if the employee has the choice of using HRA contributions for premiums or cost sharing, then these amounts cannot be counted toward the minimum-value test. This again indicates to us how mixed HRA contributions may be counted.

INTEGRATED HRAS AND THE ACTUARIAL VALUE OF A SMALLGROUP PLAN

Final regulations issued on February 25, 2013 state that for determining the actuarial value (AV) of a small-group market health plan—i.e., whether the plan is 60%, 70%, 80% or 90% AV (+/-2%)—amounts newly made available under an integrated HRA that may only be used for cost-sharing of the component health plan may be counted when calculating the plan's AV.²¹

HRAS USED TO PURCHASE AN INDIVIDUAL HEALTH PLAN

The set of FAQs issued on January 24, 2013, included an FAQ that specifically provides that "an employer-sponsored HRA cannot be "integrated" with individual- market coverage or with an employer plan that provides coverage through individual policies."²² This guidance appears to indicate that an employee cannot purchase an individual health plan with employer contributions through an HRA because this arrangement will violate PHSA section 2711. In other words, this arrangement would be considered a stand-alone HRA— not an integrated HRA—or purposes of the annual-limit restrictions. Informal conversations with the federal agencies indicate that this position may be codified in forthcoming regulations, although there is no set date on when future guidance on this issue may be released.

CONCLUSION

The enactment of PPACA will clearly have a significant impact on HRAs and how employers may utilize an HRA as a funding mechanism for premiums and/or other cost sharing under a group health plan. To be sure, not all HRAs will go away under PPACA. However, employers, employee benefit practitioners and TPAs must understand the various intricacies of the new law, and they must adhere to the new requirements and new definitions applicable to HRAs in a post-healthcare-reform world.

Originally published in Health Insurance Underwriter.

Footnotes

1 For example, fully insured small-group health plans must provide for the essential health benefits, offer the "metal levels" of coverage that meet specified actuarial values and limit cost sharing under the plan. On the other hand, fully insured large-group plans, along with self-insured plans (of any size), are not required to provide for the essential health benefits or offer the metal levels of coverage. However, fully insured large group plans and self-insured plans must limit the cost sharing under the plan by complying with specified out-of-pocket maximum limitations.

2 These reforms generally require group health plans to provide coverage for "adult children" until age 26, and prohibit (1) pre-existing condition exclusions for children under 19, (2) rescissions of coverage, except in limited circumstances, and (3) any lifetime dollar limits on essential health benefits. In addition, non-grandfathered plans must (1) cover specified preventive services without cost sharing, (2) comply with patient-protection provisions relating to choice of primary care providers and pediatricians and access to OB/GYN providers, (3) provide direct access to emergency services and comply with new payment requirements related to emergency services provided out of network, and (4) comply with new requirements for claims and internal and external appeals processes (and related notice rules). Furthermore, fully insured non-grandfathered plans may not discriminate in favor of highly compensated individuals. A second round of reforms is also scheduled to take effect for plan years beginning on or after January 1, 2014, which include eliminating all pre-existing condition exclusions, eliminating waiting periods that exceed 90 days and covering the cost of clinical trial participation.

3 The essential health benefits are a list of specified medical services that must be covered under the plan. HHS issued regulations implementing the essential health benefits requirement, effectively permitting states to designate an EHB benchmark plan. In most states, the EHB benchmark plan is the most popular health plan in the state's small-group market by enrollment [78 Fed. Reg. 12834 (Feb. 25, 2013)].

4 See section 4980H of the Internal Revenue Code ("Code"). Proposed regulations also permit an employer to use the employee's hourly rate of pay or the Federal Poverty Line as benchmarks for determining "affordability" [78 Fed. Reg. 218, 233-235 (Jan. 2, 2013)]

5 Code section 36B(c)(2)(C)(i); Treas. Reg. section 54.4980H-5(e)(2)(ii)

6 Code section 36B(c)(2)(C)(ii)

7 Section 2711(a)(2) of the Public Health Services Act ("PHSA"). The annual limits imposed on the dollar value of "essential health benefits" cannot be less than: $750,000 for plan years beginning between September 23, 2010 and September 22, 2011, $1.25 million for plan years beginning between September 23, 2011 and September 22, 2012, and $2 million for plan years between September 23, 2012 and December 31, 2013

8 PHSA section 2711(a)(1). New PHSA section 2711 applies to both "grandfathered" and "non-grandfathered" group health plans [45 C.F.R. section 147.140(d)]

9 See 75 Fed. Reg. 37188 (June 28, 2010)

10 75 Fed. Reg. at 37190-37191

11 See Notice 2002-45

12 75 Fed. Reg. at 37190-37191

13 75 Fed. Reg. at 37191

14 FAQs about Affordable Care Act Implementation Part XI ("FAQs"), http://www.dol.gov/ebsa/faqs/faq-aca11.html

15 See FAQs, Question #3, http://www.dol.gov/ebsa/faqs/faq-aca11.html

16 See 75 Fed. Reg. at 37190-37191

17 Code section 4980D(b)(1). Note that the Patient Protection and Affordable Care Act ("ACA") added section 9815 to the Code which incorporated by reference, among other things, the annual limit restrictions under PHSA section 2711, thereby making the tax under Code section 4980D applicable in the case of any failure to comply with this new requirement

18 78 Fed. Reg. 25909, 25911 (May 3, 2013)

19 77 Fed. Reg. 30377, 30380 (May 23, 2012)

20 78 Fed. Reg. at 25911

21 78 Fed. Reg. 12834, 12850 (Feb. 25, 2013)

22 See FAQs, Question #2, http://www.dol.gov/ebsa/faqs/faq-aca11.html

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.