A. Employer Use of HRAs Under the ACA is Limited – Not Eliminated
Many smaller employers, including non-profit organizations, in the past have provided health insurance coverage for their employees through reimbursement of premiums for individual health insurance policies under a “health reimbursement account” or “health reimbursement arrangement” (“HRA”). However, with the enactment of the Affordable Care Act (“ACA”), this arrangement is in general no longer permitted, as certain FAQs and other guidance published, in part, by the Department of Labor (“DOL”) have made clear. In brief, an HRA may generally NOT be used to reimburse employees for the purchase of individual health insurance coverage (including policies available on a public (ACA) exchange) without violating the ACA except under certain circumstances, explained as follows:
1. Although an employer may not be subject to the ACA employer mandate and certain other provisions of the ACA (e.g., because it does not employ at least 50 full-time employees), an HRA is subject to certain “market reform” provisions that the ACA added to the Public Health Service Act (“PHSA”) which the DOL, the IRS (Treasury Department) and the Department of Health and Human Services (“HHS”), through publication of FAQs and certain Notices, have interpreted restrictively.
2. An HRA is considered a group health plan that, unless excepted, must satisfy two market reform requirements: (i) the PHSA annual dollar limit prohibition (e.g., no lifetime or annual limits on medical coverage), and (ii) the PHSA preventive service rules (i.e., certain preventive services cannot be provided under employee cost-sharing (co-payments, co-insurance or deductibles)). A typical “stand alone” HRA cannot meet these rules because it is limited to reimbursement of premiums for coverage under a health plan.
3. However, an HRA that is “integrated” with another group health plan that meets the PHSA dollar limit and preventive service rules will itself be considered compliant with these rules. An HRA is considered “integrated” with a group health plan if the HRA complies with one of two methods that have certain criteria that need to be met (as set forth in Notice 2013-54). Therefore, unless (i) the employer group health plan to which the HRA relates satisfies the PHSA dollar limit and preventive service rules, and (ii) the HRA complies with either integration method, the HRA would not be compliant with the ACA.
4. An HRA that is limited to fewer than two participants who are current employees on the first day of a plan year (such as a retiree-only HRA) would not be impacted by the PHSA rules. Therefore, arguably an HRA may be established for only one participant who is an employee on the first day of the plan year and be excepted from the market reform requirements. However, it is unlikely that the employer could establish an HRA covering one participant for each of its employees, as the IRS would likely consolidate the HRAs for this purpose.
5. Arguably, an HRA may be established to provide for payment of Medigap premiums and other excepted benefits under the Code (such as coverage for accident or disability insurance), as the HRA would be considered to be providing excepted benefits only and not be governed by the market reform requirements. However, to date there is no official guidance on this point. Moreover, as Medicare would be considered the primary health insurance provider for a Medicare-covered employee of an employer with fewer than twenty employees, providing health coverage for such an employee through an HRA could prove impractical and costly for the coverage being provided.
Alternatively, the employer may increase an employee’s compensation that may or may not be used to pay for premiums outside Code Sections 105/106, but such compensation would be part of the employee’s gross income subject to ordinary income tax rates.
B. Happy New Year! - Now Take Care of This
The New Year is upon us, which means certain benefits requirements now need attention.
1. Multiple Destination Rollovers and the Single Distribution Rule - Update
Effective January 1, 2015, participants in Code Section 401(k), 403(b) or 457(b) plans who choose to direct their plan distribution to be rolled over to more than one recipient IRA or other eligible retirement plan at the same time will have the amounts treated as a single distribution for the purpose of allocating pre-tax and after-tax basis. IRS Notice 2014-54 allows a retirement plan participant to roll over amounts to both a Roth IRA and non-Roth IRA, allocate the pre-tax amount to the non-Roth IRA and the after-tax amount to the Roth IRA, and avoid paying income tax on the pre-tax amounts rolled over to the non-Roth IRA.
However, recent IRS guidance in the form of published Q’s and A’s provides that:
(i) A rollover of only after-tax plan amounts to a Roth IRA results in the rollover being treated as including a proportional share of both the pre-tax and after-tax amounts in the plan account balance: the participant cannot roll over only after-tax amounts and leave the pre-tax amounts in the plan in order to avoid income tax on the after-tax amounts, because the IRS will consider the rollover amount (a rollover of only part of the retirement account balance) to include both pre-tax and after-tax amounts. (In order to avoid this result, the participant must make a total rollover of the plan account balance and allocate all the pre-tax amounts into a direct rollover to a non-Roth IRA or other eligible retirement plan, and allocate all the after-tax amounts into a direct rollover to a Roth IRA.)
(ii) Earnings related to after-tax contributions are considered pre-tax amounts in a plan account. Therefore, a plan participant can roll over only after-tax contributions to a Roth IRA, and roll over all pre-tax contributions (including earnings on after-tax contributions) to a traditional IRA or other eligible retirement plan to defer income tax until ultimate distribution.
2. Cycle D Determination Letter Filings, Pre-Approved Plan Filings Due
(i) Pursuant to the IRS determination letter program, a plan sponsor with an Employer Identification Number (“EIN”) that ends in 4 or 9 was able to submit its individually designed plan (as amended and restated) to the IRS for a favorable determination letter no later than January 31, 2015 in order to ensure the plan continues to be tax-qualified.
(ii) An employer that has adopted a tax-qualified prototype plan or volume submitter plan (a “pre-approved plan”) must restate the plan by April 30, 2016 in order to comply with changes in the law enacted since the Economic Growth and Tax Relief Reconciliation Act. Failure to comply with such changes in the law (including requirements under the Pension Protection Act of 2006) could result in disqualification. Accordingly, as the sponsoring organization is currently within the cycle for plan restatement and submission of the plan to the IRS for an advisory or opinion letter, the employer should inquire of the sponsoring organization of the plan (e.g., accounting firm, attorney, financial institution or insurer) when the plan restatement will be available for review (and when the plan will be submitted to the IRS for approval), and to effectuate such review with counsel, in order to ensure that the restatement continues to reflect the employer’s policies and objectives.
(iii) Revenue Procedure 2015-6, effective February 1, 2015, provides updates to the IRS determination letter program, with some minor modifications to the current procedures, including a new Reference List being encouraged for applications. Revenue Procedure 2015-8 updates the IRS user fee program, which is largely unchanged from 2014.
C. “New and Improved” Benefits Legislation
Recent legislation enacted into law provides for retroactive application of certain benefits law provisions and implements certain benefits law reforms.
The Tax Increase Prevention Act of 2014 and the Consolidated and Further Continuing Appropriations Act of 2015 extend certain benefits provisions that either had expired or would have expired by the end of 2014, and add new benefits reforms, including: (i) provision for tax-free treatment of IRA distributions of up to $100,000 contributed to charity (extension through 2014); (ii) parity for employer-provided mass transit and parking benefits for purposes of the exclusion of up to $250 from an employee’s gross income (extension through 2014); (iii) modification of rules relating to PBGC liability and reporting and requirements designed to prevent or forestall PBGC intervention of multi-employer pension plans; (iv) changes in cafeteria plan testing; (v) a clarification that a plan will not fail to be treated as an accident or health plan if the plan provides for qualified reservist distributions; (vi) provision for states to establish tax-exempt “Achieving a Better Life Experience” (“ABLE”) accounts to enable persons with disabilities to provide tax-favored funding for qualified disability expenses; and (vii) the exemption of “expatriate health plans” (e.g., health plans in which substantially all of the primary enrollees are qualified expatriates) from various provisions of the Affordable Care Act.
