Guest Article

(From the September 12, 2011 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Will the Affordable Care Act Ultimately Prohibit Stand-Alone HRAs?

The Department of Health and Human Services recently exempted certain health reimbursement arrangements (HRAs) from the need to request a waiver from the annual limit requirements imposed by the Patient Protection and Affordable Care Act (PPACA). Those HRAs, in other words, will not have to comply with the phase-in of increasingly higher minimum annual limits required of group health plans and health insurance prior to 2014. However, unless further relief is provided, the PPACA will ultimately prohibit many stand-alone HRAs because those arrangements will not be able to satisfy the "no annual limit" requirements.

PPACA's Prohibition on Annual Limits

The PPACA added provisions to the Public Health Service Act, ERISA and the Internal Revenue Code that generally prohibit group health plans and health insurance issuers in the group and individual markets from imposing annual limits on essential health benefits. This prohibition is gradually phased in—as increasingly higher minimum annual limits—for plan years beginning before 2014. For example, for plan years beginning on or after September 23, 2011 but before September 23, 2012, a plan's minimum annual limit on essential health benefits must be at least $1.25 million. For plan years beginning on or after January 1, 2014, no annual limits may be imposed on essential health benefits.

To protect individuals who have access only to limited benefit or "mini-med" plans from losing coverage or having to pay significantly higher premiums as a result of these new requirements, the PPACA allows waivers to be granted to those group health plans or issuers who demonstrate that complying with the higher annual limits will significantly decrease access to benefits or significantly increase the premiums paid by individuals who are currently covered. These waivers are available only for the phase-in period—that is, for plan years beginning before January 1, 2014—and are generally available only to plans and policies that were in effect before September 23, 2010 (i.e., that were in effect before the PPACA's general effective date).

Regulations Acknowledge Limited Carve-Out

Interim final regulations were issued in June 2010 to implement the new annual limit requirements. The preamble addresses the unique aspects of individual account plans and explains that health flexible spending arrangements, medical savings accounts, and health spending accounts are not subject to the annual limit requirements. However, HRAs—which typically consist of a promise by an employer to reimburse medical expenses for the year up to a certain amount, with unused amounts available to reimburse medical expenses in future years—are generally required to comply. The preamble goes on to explain, however, that when an HRA is integrated with other coverage as part of a group health plan and that other coverage complies with the annual limit requirements, the HRA will satisfy those requirements as part of the combined benefit. It also acknowledges that stand-alone HRAs that are limited to retirees are not subject to the annual limit requirements. ERISA and Code provisions would also exempt HRAs that provide only excepted benefits (e.g., limited scope dental or vision benefits). However, the preamble indicates that other stand-alone HRAs would be subject to the requirements and it requested comments on how the annual limit requirements would apply.

Temporary Class Exemption Provided

The regulations left some uncertainty regarding whether other stand-alone HRAs must (or even could) comply with the annual limit requirements, and employers that provided their employees with such HRAs were concerned that they needed a "mini-med" waiver in order to comply during the phase-in period prior to 2014. The Department of Health and Human Services recently issued guidance and relief on that issue. It exempted as a class all HRAs that were in effect prior to September 23, 2010 and are subject to the annual limit requirements. Those HRAs do not have to individually apply for an annual limit waiver for the phase-in period. However, they must still comply with the record retention and annual participant notice requirements that otherwise apply when a waiver is granted. Employers with such stand-alone HRAs are urged to comply with the notice and reporting requirements to cement their pre-2014 compliance with the annual limit requirements.

Covered Stand-Alone HRAs Need Relief

Significantly, the guidance does not provide a waiver for any stand-alone HRAs that became effective on or after September 23, 2010. Nor does it expand the waiver program to permit such recently adopted HRAs to apply for an individual waiver (before the waiver program closes on September 22, 2011). Therefore, unless further relief is provided, stand-alone HRAs (that are not retiree-only or excepted-benefit HRAs) that became effective on or after September 23, 2010 are currently subject to the annual limit requirements, and those which became effective earlier but are covered by the class exemption will be subject to the annual limit requirement when the exemption expires beginning with the first plan year beginning on or after January 1, 2014.

Public comments on the interim final regulations included various requests regarding HRAs, including that all HRAs (whether stand-alone or integrated with other coverage) be exempt from the annual limit requirements.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2011, Deloitte.