Notice 2015-17: Employer Sponsored HRA Rules

By Larry Grudzien
Attorney-At-Law

An employer-sponsored HRA will not be able to avoid the annual limit requirements by being integrated with individual market coverage or with an employer plan that provides coverage through individual policies. The Agencies apply this rule to any group health plan used to purchase coverage on the individual market, not just to HRAs.The group health plan is not integrated with the individual market coverage for purposes of the annual dollar limit prohibition. For example, an employer payment plan that reimburses employees for an employee’s substantiated individual insurance policy premiums is required to, but cannot, comply with the annual dollar limit prohibition because it is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement and it cannot be integrated with any individual health insurance policy purchased under the arrangement, as provided in  Notice 2013-54 and EBSA Technical Release 2013-03, Q&A-1.  This rule was effective for plan years beginning on or after January 1, 2014.
 
These arrangements fail to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under Internal Revenue Code (“Code”) Section 4980D.

On February 18, 2015, the IRS released Notice 2015-17 which provides transition relief from the assessment of excise tax under Code Section 4980D for failure to satisfy market reforms in certain circumstances. The transition relief applies to employer healthcare arrangements that constitute:

 (1) employer payment plans, as described in Notice 2013-54, if the plan is sponsored by an employer that is not an Applicable Large Employer (ALE) under Code Sections 4980H(c)(2) and Sections 54.4980H-1(a)(4) and -2;

 (2) S corporation healthcare arrangements for 2-percent shareholder-employees;
 
 (3) Medicare premium reimbursement arrangements; and

 (4) TRICARE-related health reimbursement arrangements (HRAs).

 The following is an explanation of this transitional relief.
 
(1) Employer Payment Plans: This Notice provides limited transition relief for coverage sponsored by an employer that is not an applicable large employer (“ALE”).  For this purpose, an ALE generally is, with respect to a calendar year, an employer that employed an average of at least 50 full-time employees (including full-time equivalent employees) on business days during the preceding calendar year. The reason that the IRS is providing this relief is that the SHOP Marketplace will address many of the concerns of small employers and it is still transitioning and the transition by eligible employers to SHOP Marketplace coverage or other alternatives will take time to implement. This Notice provides that the excise tax under Code Section 4980D will not be asserted for any failure to satisfy the market reforms by employer payment plans that pay, or reimburse employees for individual health policy premiums or Medicare part B or Part D premiums:
 
(a) for 2014 for employers that are not ALEs for 2014, and
 
(b) for January 1 through June 30, 2015 for employers that are not ALEs for 2015.

After June 30, 2015, such employers may be liable for the Code Section 4980D excise tax.
 
Employers eligible for this relief that have employer payment plans are not required to file IRS Form 8928 (regarding failures to satisfy requirements for group health plans for the market reforms) solely as a result of having such arrangements for the period for which the employer is eligible for the relief. This relief does not extend to stand-alone HRAs or other arrangements to reimburse employees for medical expenses other than insurance premiums.
 
(2) Treatment of S corporation healthcare arrangements for 2-percent shareholder-employees):  Until guidance is released, an S corporation can continue to pay for or reimburse premiums for individual health insurance coverage covering a 2-percent shareholder.  Such payment or reimbursement is included in income but the 2-percent shareholder-employee may deduct the amount of the premiums under the Internal Revenue Code.  Until such guidance is released, S corporations will not subject to the excise tax.
 
(3) Integration of Medicare premium reimbursement arrangement and TRICARE-related HRA with a group health plan: If an employer offers to reimburse Medicare premiums for its active employees, it creates an employer payment plan because Medicare is not considered employer group coverage. An employer payment plan that pays for or reimburses Medicare Part B or Part D premiums is integrated with another group health plan offered by the employer for purposes of the annual dollar limit prohibition and the preventive services requirements if:
 
(a) the employer offers a group health plan (other than the employer payment plan) to the employee that does not consist solely of excepted benefits and offers coverage providing minimum value;
 
(b) the employee participating in the employer payment plan is actually enrolled in Medicare Parts A and B;
 
(c) the employer payment plan is available only to employees who are enrolled in Medicare Part A and Part B or Part D; and
 
(d) the employer payment plan is limited to reimbursement of Medicare Part B or Part D premiums and excepted benefits, including Medigap premiums.
 
Note that to the extent such an arrangement is available to active employees, it may be subject to restrictions under other laws such as the Medicare secondary payer provisions. An employer payment plan that has fewer than two participants who are current employees (for example, a retiree-only plan) on the first day of the plan year is not subject to the market reforms and, therefore, integration is not necessary to satisfy the market reforms.
 
The same type of rules also apply to reimburse of TRICARE premiums.
 
(4) Increases in employee compensation to assist with payments of individual market coverage: If an employer increases an employee’s compensation, but does not condition the payment of the additional compensation on the purchase of health coverage (or otherwise endorse a particular policy, form, or issuer of health insurance), this arrangement is not an employer payment plan.  Since this generally will not constitute a group health plan, it is not subject to the market reforms.
 
(5) Treatment of an employer payment plan as taxable: Any arrangement under which an employer provides reimbursements or payments that are dedicated to providing medical care, such as cash reimbursements for the purchase of an individual market policy, is itself a group health plan and is subject to the market reform provisions of the Affordable Care Act applicable to group health plans without regard to whether the employer treats the money as pre-tax or post-tax to the employee. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will fail to satisfy PHS Act §§ 2711 (annual limit prohibition) and 2713 (requirement to provide cost-free preventive services) among other provisions.
 
If you have any comments or questions regarding any of the above information, please do not hesitate to call me at (708) 717-9638 or e-mail me at larry@larrygrudzien.com