Employee Benefits-DOL Provides Guidance On New Small Employer HRAs

Continuing the discussion of my previous blogs on FAQs Part 35, one topic covered in these FAQs is a discussion of the new Qualified Small Employer Health Reimbursement Arrangements.  Here is what the FAQs say on this topic:

Background and Prior Guidance.  On September 13, 2013, the U.S. Department of Labor (the “DOL”) published Technical Release 2013-03 addressing the application of the Affordable Care Act market reforms to health reimbursement arrangements (“HRAs”) and employer payment plans (“EPPs”).  The Treasury Department and the Internal Revenue Service (the “IRS”) contemporaneously published parallel guidance in Notice 2013-54.  The U.S. Department of Health and Human Services (the “HHS”) issued guidance stating that it concurred in the application of the laws under its jurisdiction as set forth in the guidance issued by DOL, Treasury, and IRS (the DOL, Treasury, IRS and HHS being referred to below as the “Departments”).  Subsequent guidance reiterated and clarified the application of the market reforms to HRAs and EPPs.

EPPs and HRAs typically consist of an arrangement under which an employer reimburses medical expenses (whether in the form of direct payments or reimbursements for premiums or other medical costs) up to a certain amount.  As explained in Technical Release 2013-03 and Notice 2013-54, EPPs and HRAs are group health plans that are subject to the group market reform provisions of the Affordable Care Act, including the prohibition on annual dollar limits under PHS Act section 2711 and the requirement to provide certain preventive services without cost sharing under PHS Act section 2713.  The 2013 guidance generally provides that EPPs and HRAs will fail to comply with these group market reform requirements because these arrangements, by their definitions, reimburse or pay medical expenses on the employee’s behalf only up to a certain dollar amount each year.

The 2013 guidance further provided that an HRA will not fail to meet the group market reform provisions of the Affordable Care Act when “integrated” with a group health plan that otherwise complies with those provisions under the integration methods described in that guidance.  On November 18, 2015, the Departments issued final regulations implementing PHS Act section 2711, which incorporate the general rule set forth in the 2013 guidance clarifying that an HRA or EPP cannot be integrated with individual market policies to satisfy the market reforms.

New Question.  The 21st Century Cures Act (the “Cures Act”), enacted on December 13, 2016, includes provisions allowing small employers to offer arrangements similar to an HRA or EPP that may be used to pay for or reimburse medical expenses, including coverage on the individual market. How do these provisions of the Cures Act affect the Departments’ previous guidance regarding HRAs and EPPs?

The Answer.  To address concerns raised by application of the group market provisions to certain arrangements of small employers, section 18001 of the Cures Act introduces a new type of tax preferred arrangement that small employers may use to help their employees pay for medical expenses–the “qualified small employer health reimbursement arrangement” (or “QSEHRA”).  The Cures Act amends Code section 9831, ERISA section 733, and PHS Act section 2791, and provides that a QSEHRA is not a group health plan.

Requirements For A QSEHRA–  Under the Cures Act, a QSEHRA is an arrangement offered by an eligible employer that meets the following criteria:

(1) the arrangement is funded solely by an eligible employer, and no salary reduction contributions may be made under the arrangement;

(2) the arrangement provides, after the employee provides proof of coverage, for the payment to, or reimbursement of, an eligible employee for expenses for medical care (as defined in Code section 213(d)) incurred by the eligible employee or the eligible employee’s family members (as determined under the terms of the arrangement);

(3) the amount of payments and reimbursements described in (2) for any year do not exceed $4,950 ($10,000 in the case of an arrangement that also provides for payments or reimbursements for family members of the employee) (with amounts to be indexed for increases in cost of living); and

(4) the arrangement is provided on the same terms to all eligible employees of the eligible employer.

An Eligible Employer–  To be an eligible employer that may offer a QSEHRA, the employer may not: (i) be an applicable large employer (an “ALE”) as defined in Code section 4980H(c)(2) (and thus may not be an employer that, generally, employed at least 50 full-time employees, including full-time equivalent employees, in the prior calendar year) and (ii) offer a group health plan to any of its employees.

Market Reforms Do Not Apply–  The Departments’ prior guidance concluded that EPPs and non-integrated HRAs are group health plans that fail to comply with the group market reform requirements that prohibit annual dollar limits under PHS Act section 2711 and that require the provision of certain preventive services without cost sharing under PHS Act section 2713.  Because a QSEHRA is statutorily excluded from the definition of a group health plan, the group market reform requirements do not apply to a QSEHRA.  With respect to EPPs and HRAs that do not qualify as QSEHRAs, the Departments’ prior guidance continues to apply.

Effective Date And Relief From Penalties –  The statutory exclusion of QSEHRAs from the group health plan definition is effective for plan years beginning after 2016.  The Q&As note that, for earlier plan years, the Cures Act provides that the relief under IRS Notice 2015-17 for the failure to follow certain market reforms applies.