H&W: Integration of HRAs with Group Health Plans

The IRS recently published Notice 2015-87 which provides additional guidance to employers on compliance with the Affordable Care Act (“ACA”).  This Notice is lengthy and meaty and covers a multitude of topics.  We will try to break it down into smaller bites with a series of blogs.  This first blog focuses on the integration of HRAs with group health plans.

We still see situations where employers are maintaining HRAs that are not properly integrated with a group health plan.  Integrated HRAs are not considered health plans and therefore do not have to comply with the ACAs market reforms.   Conversely, HRAs that are not integrated will be subject to market reforms (such as no annual or lifetime limits) and therefore will be non-compliant.  For more information on integration of HRAs, please click here.

Integration of HRAs

Notice 2015-87 addresses specific arrangements that may or may not affect an HRA’s integration with a group health plan.

As a general rule, HRAs that permit the purchase of individual coverage are not integrated. However, HRAs that cover fewer than two active employees are not health plans subject to market reforms.  Accordingly, such an HRA – a retiree only plan, for example – may permit retirees to purchase individual coverage.  Note however, that this still constitutes an employer-sponsored health plan.  As a result, a participant in an HRA with available funds for any month will not be eligible for a premium tax credit for that month.

Unused amounts that were credited to an HRA while it was integrated with other group health plan coverage may be used to reimburse medical expenses in accordance with the terms of the HRA after an employee ceases to be covered by the other integrated group health plan coverage. However, this is not the case where the HRA permits a former employee to purchase individual coverage.

Broadly speaking, an HRA is not integrated if it permits coverage of persons who are not, in fact, covered under a group plan that does meet the ACA’s market reform requirements. As a logical application of this rule, the Notice states that if an employee’s spouse or dependents are not covered under the employer’s group plan, the HRA cannot be used to pay the medical expenses of those individuals.

• Concerned that many HRAs do not meet this requirement, the IRS has extended transition relief. For plan years beginning before January 1, 2016, the IRS will not view an HRA as failing to be integrated solely because it reimburses the expenses of family members not covered under the employer’s ACA-compliant plan.
• Note however, that the reporting rules still apply. Accordingly, the employer will need to report coverage under the HRA for each individual who is not covered under the group health plan but whose expenses are reimbursable under the HRA.

To this point, we have been talking about integration between an HRA and a group health plan. The Notice also discusses integration of cafeteria plan arrangements that reimburse the cost of individual market coverage.  The Notice clarifies that the cafeteria plan is not integrated and accordingly must comply with market reform rules.  However, it fails to do so because it is viewed as imposing  an annual limit up to the cost of the individual market coverage purchased through the arrangement;  and because  it does not provide preventive services without cost-sharing in all instances.