United States: Issue 98: Year-End Agency FAQs Address Many Unanswered ACA Concerns

Last Updated: January 19 2016
Article by Diane V. Dygert and Benjamin J. Conley

This is the ninety-eighth issue in our health care reform series of alerts for employers on selected topics in health care reform. (Our general summary of health care reform and other issues in this series can be accessed by clicking here.) This series of Health Care Reform Management Alerts is designed to provide a more in-depth analysis of certain aspects of health care reform and how it will impact your employer-sponsored plans.

On December 16, the IRS, DOL and HHS issued IRS Notice 2015-87, a series of 26 FAQs addressing a range of unanswered questions under the Affordable Care Act's employer mandate and the so-called "market reforms." While many of these FAQs simply reiterated points made in earlier agency guidance, the Notice contained guidance on a series of previously unanswered questions, such as determining the "affordability" of coverage where the employer provides a "fringe" contribution under the Service Contract Act or where the employer provides an opt-out credit for employees who decline employer-sponsored coverage. This issue summarizes some of the highlights of this new agency guidance.

HRAs and Employer Payment Plans

  • No stand-alone HRAs for active employees. The Notice reiterates that stand-alone health reimbursement accounts (HRAs) and employer payment plans may cover retirees, but to the extent they cover more than one active employee, the coverage must generally be integrated with group health coverage (i.e., they cannot be used to purchase individual insurance policies). The restrictions on stand-alone HRAs for active employees primarily stem from the ACA's restriction on annual dollar limits and the preventive service mandate. In the agencies' perspective, HRAs, by their very nature, contain an annual dollar limit and do not necessarily reimburse for all preventive services mandated by the ACA at 100%.
  • No family HRA unless all family members have other group health coverage. If an HRA is broadly available to every tax dependent of an employee, then every tax dependent of that employee must be enrolled in other group health coverage. The agencies encourage plan sponsors to limit HRA eligibility to those persons enrolled in the employer's group health coverage to facilitate this restriction (although presumably other, group health coverage would also satisfy agency standards if the other coverage provides minimum value).

    Delayed Effective Date: The agencies acknowledge that many HRAs may not currently comply with this standard, so the agencies will not enforce this standard for plan years commencing prior to January 1, 2016. For HRAs that were in violation of this standard but were in effect as of December 16, 2015 and remain unmodified thereafter, the agencies will not enforce this standard for plan years commencing prior to January 1, 2017.
  • HRAs/Employer Payment Plans that solely reimburse for excepted benefits not subject to the same restrictions. As noted above, the ACA's restrictions on stand-alone HRAs primarily stem from the certain group health plan mandates, such as the prohibition on annual dollar limits and the preventive service mandate. These group health plan requirements do not apply to excepted benefits (such as most dental/vision policies). As a result, the agencies clarified in the Notice that the prohibitions on stand-alone HRAs and employer payment plans will not extend to HRAs that limit reimbursement to premiums or out-of-pocket expenses for excepted benefits, such as most dental and vision expenses, or for Medicare supplemental insurance policies.

Determining Affordability

  • HRA funds that may be used to pay premiums must be considered in determining whether coverage is "affordable." If an employee may use HRA amounts to pay premiums or both for premiums and other cost-sharing obligations, then those HRA amounts must be factored into the affordability analysis. Employer HRA contributions must only be considered if they are required under the plan or otherwise determinable within a reasonable period of time prior to the employee's enrollment date in the coverage. In other words, if the employee is uncertain whether HRA contributions will be available at the time of enrollment, it appears those contributions need not factor into the affordability analysis. The employer contribution is treated as being made ratably for each month to which it relates. For instance, if the employer contributes $1,200 annually, the employee's premium would be treated as being reduced by $100 each month of the year, for affordability purposes.
  • Employer "flex credit" contributions may also impact coverage affordability. Similarly, if employers provide "flex credits" to a cafeteria plan that may be used exclusively to pay for health care benefits (either through premium reduction or as a contribution to a health FSA to pay for unreimbursed out-of-pocket expenses), those flex credits can be treated as reducing the cost of coverage. Please note: if (a) the flex credit may be applied for non-health-care purposes, such as dependent care or life insurance (as many are), or (b) the flex credit may be "cashed out" as taxable compensation, then it cannot be treated as reducing the employee's cost for health coverage, when calculating affordability. (Note, however, the bullet below relating to taxable "opt-out" payments.)

    Delayed Effective Date: For plan years beginning before January 1, 2017, an employer may treat a flex credit as reducing an employee's required contribution, from an affordability perspective, even if that flex credit may also be applied for non-health-care purposes (such as dependent care or life insurance). This relief is only available if the flex credit was in effect on December 16, 2015, and not modified thereafter to be eligible for non-health-care purposes. While the IRS permits employers to report these flex credits as reducing the employee's required cost-sharing on IRS Form 1095-C, the IRS encourages employers to report employee cost without regard to any reduction due to a flex credit contribution. The reduced cost due to the flex credit contribution could require employees who received a tax credit on the exchanges to demonstrate through other means that coverage was unaffordable. Instead, the IRS encourages employers report the cost of coverage without regard to the flex credit and to address the affordability on appeal, if the IRS inquires relating to whether coverage was affordable. It remains to be seen whether employers will invite such a discussion on penalty appeal rather than simply heading the issue off at the pass, by making an adjustment on the Form 1095-C.
  • Opt-out payments may increase the cost of health coverage. Employers who offer employees a taxable cash payment for declining coverage, without conditioning such payment on demonstrating that the employee has other group coverage (such as coverage through a spouse) must increase the applicable employee cost of coverage by the amount of the available opt-out payment. For instance, if self-only coverage costs $100 per month, but the employer provides employees who decline coverage (unconditionally) with a $200 cash payment, then employers must treat all employees as being required to pay $300 for coverage, from an affordability perspective. The IRS will request comments in forthcoming regulations as to how conditional opt-out payments should be treated, from an affordability standpoint (e.g., opt-out payments that are only available upon proof of other coverage).

    Delayed Effective Date: The IRS intends to propose this mandatory inclusion of opt-out payments in future regulations. Those regulations will not be effective until issued. The IRS anticipates that the regulations, when issued, will also require inclusion of unconditional opt-out payments that were implemented after December 16, 2015, or existing opt-out payments that were enhanced after December 16, 2015. During this transition period, employers will not be required to report conditional (or unconditional) opt-out payments as increasing the cost of the employee's required contribution for coverage.
  • Service Contract Act/Davis-Bacon Act - Fringe contributions generally serve to reduce employee contribution. Under the Service Contract Act/Davis Bacon and Related Acts (SCA/DBRA), certain federal contractors are required to make a so-called "fringe" contribution to employees either as wages or toward benefits (such as health care or 401(k)). Employers will often apply the fringe contribution to reduce participant health care contributions, but pay that amount to employees as taxable wages if they decline health coverage. While the IRS is still considering how to treat such a fringe contribution, for purposes of coverage affordability, for plan years prior to January 1, 2017, employers may treat fringe contributions as reducing employees' required cost for coverage, for purposes of such coverage's affordability. This is only true to the extent that any amount paid to employees declining health coverage does not exceed the applicable fringe contribution amount required under the SCA/DBRA. Similarly, for reporting purposes, employers may treat such fringe contributions as reducing the cost of employee coverage. That being said, this may complicate individual tax returns, because employees are permitted to disregard cost reductions resulting from fringe contributions, so the IRS encourages employers to leave these fringe amounts out when reporting and simply address the situation if contacted by the IRS. As noted above, however, we suspect many employers will take the cautious route and report the lower cost of coverage in order to avoid an IRS penalty appeal entirely.
  • Inflation adjustments for affordability safe harbor. The Notice provides that the 9.5% threshold used for purposes of all three affordability safe harbors (W2, Federal Poverty Line and Rate of Pay) will be adjusted for inflation. Accordingly, future IRS regulations will adjust these amounts to 9.56% for 2015 and 9.66% for 2016.

Other Employer Mandate Guidance

  • Inflation adjustment for penalty amounts. The Notice provides that the penalties under the employer mandate (generally, $2,000 per full-time employee for failure to offer coverage and $3,000 for failure to offer affordable, minimum value coverage) will be adjusted for inflation in years after 2014. Accordingly, for 2015 the penalty amounts will be $2,080 and $3,120, and for 2016 the penalty amounts will be $2,160 and $3,240.
  • Clarifications to "hours of service." The Notice clarifies that for purposes of determining "full-time" status under the employer mandate, "hours of service" does not include payments made solely to comply with workmen's compensation laws or state disability insurance laws. Similarly, it does not include payments that are reimbursements for medical expenses.

However, "hours of service" includes payments made by an employer regardless of whether the payment is made by the employer directly, or indirectly (such as through a trust fund or insurer to which the employer contributes or pays premiums). This includes payments from a disability insurer, unless the employee paid the premium for such disability coverage entirely and on an after-tax basis. It does not include state-mandated worker's compensation or disability payments.

  • Employees of third-party agencies providing services to educational organizations. IRS guidance under the employer mandate provides special protections to employees of educational organizations (to account for the fact that many employees of educational organizations do not perform services over the summer and would otherwise not qualify as full-time employees). The IRS intends to issue guidance extending these protections to employees of third-party organizations who provide services to educational organizations, unless such employees are provided other meaningful opportunities to work during summer months.
  • Offer of TRICARE considered offer of minimum essential coverage. Employers will be treated as having offered minimum essential coverage for any month in which employment results in eligibility for TRICARE.

Health FSA Carryover Clarifications

  • Carryover amount must be considered in determining whether account has been "overspent." For most health FSAs, a special COBRA provision would exempt the plan from having to offer COBRA to a person who has "overspent" his or her account as of the date of the qualifying event (e.g., the person has sought reimbursement for an amount in excess of the actual dollars the person has deferred, year-to-date.) In light of the new health FSA carryover rules, plans must factor in any amount carried over from prior plan years (and add that amount to the participant's deferrals year-to-date) in determining whether the participant has overspent his/her account.
  • COBRA premium does not include health FSA carryover amounts. Where COBRA coverage must be offered under a health FSA, the applicable COBRA premium may not factor in any amounts carried over from prior plan years.
  • Carryover must be offered to COBRA beneficiaries if offered to non-COBRA beneficiaries. If the health FSA provides for a carryover, and COBRA must be offered, then the carryover feature must be available to COBRA beneficiaries. However, the COBRA beneficiary need not be offered the opportunity to elect additional salary reduction amounts or to access any applicable employer contributions to the health FSA. As noted above, there can be no COBRA premium assessed to access carryover amounts in subsequent years.
  • Plan may require participation in subsequent year to access carryover amounts. If a plan provides for a health FSA carryover, it can limit that carryover to participants who elect to make a health FSA salary deferral in the subsequent year.
  • Health FSA may limit carryover for a maximum period. The Notice clarifies that notwithstanding the addition of a carryover feature, the health FSA may limit the period for which unused amounts will carry over. The IRS gives the example of limiting carryovers for one year following the year to which they relate.

Request for Comments and Subsequent Guidance

As noted above, the agencies anticipate issuing additional rules clarifying various provisions under the ACA. As such, the agencies request comments on many of the proposals outlined above, with comments due no later than February 18, 2016. For more information on how to submit comments, see Notice 2015-87.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Diane V. Dygert
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions