January 6, 2016
The Internal Revenue Service (IRS) has released guidance on the application of market reforms to Health Reimbursement Arrangements (HRA) and employer payment plans, prevailing wage, the identification of employee contributions, Health Savings Account (HSA) rules’ application to Veterans Affairs (VA) benefits, the application of COBRA rules to Flexible Spending Account (FSA) carryover amounts, and final regulations on minimum value and premium tax credit eligibility.
On December 16, 2015, the IRS released IRS Notice 2015-87 titled “Further Guidance on the Application of the Group Health Plan Market Reform Provisions of the Affordable Care Act to Employer-Provided Health Coverage and on Certain Other Affordable Care Act Provisions.” In this notice, which is composed in a question-and-answer format, the IRS added commentary to some responses by the Departments of Treasury, Health, and Human Services and Labor, that clarifies several provisions of the Affordable Care Act (ACA) related to reporting penalty relief, application of market reforms to HRAs, employer payment plans (i.e., employer pays directly or indirectly through reimbursements for individual policies), identification of employee contributions where prevailing wage payments or flex credits apply, the application of HSA rules to persons eligible for VA benefits, and the application of COBRA rules to unused, carried-over FSA amounts.
On the same day, the IRS released final regulations on the ACA minimum value rules and other rules related to the premium tax credit, wellness incentives and employer contributions to an employee’s HRA.
Highlights of both of these publications can be found below.
IRS Notice 2015-87
Penalty Relief for Incorrect or Incomplete Employer Reporting
Pursuant to 26 U.S. Code Sections 6721 and 6722, applicable large employers that can show that they have made “good faith efforts to comply” with the [Section 6056] information reporting requirements will not be subject to penalties for the 2015 tax year.
Market Reforms’ Application to HRA, Cafeteria and Employer Payment Plans
The IRS previously addressed this topic in Notice 2013-54, which provided guidance on the application of certain provisions of the ACA to HRA, FSA and other employer-sponsored health care arrangements. In Notice 2015-87, the IRS clarifies the following points covered in the previous notice related to HRAs and IRC § 125 cafeteria plans:
- An HRA with two or fewer participants that are not current employees is not subject to ACA market reforms and need not be integrated with an employee-sponsored plan.
- Former employees covered by such an HRA are ineligible for the premium tax credit as long as funds remain available in the HRA.
- Former employees previously covered under a current-employee, integrated plan may not use the remaining HRA funds to purchase individual policies.
- A family HRA available to cover medical expenses of an employee’s spouse or children must be integrated with the coverage in which the dependents are covered and not employee-only coverage.
- To facilitate employers transitioning to compliance with this rule, transition relief is available and an HRA will not be deemed noncompliant for plan years beginning before January 1, 2016, and the HRA will be considered integrated based on the plan in place on December 16, 2015, for plan years beginning before January 1, 2017.
- The employer is responsible for Section 6055 reporting of minimum essential coverage for each individual for whom the HRA medical expenses cover who are not enrolled on the employer’s group health plan.
- An HRA and employer payment plans may be used to pay for the premiums for HIPAA-excepted benefits (e.g., dental and vision plans).
- IRC § 125 cafeteria plans cannot be used to purchase individual coverage, even if fully funded by the employer.
- For purposes of determining the affordability of an employer-sponsored plan, employer contributions to the HRA are considered, thereby reducing the employee contribution amount before using one of the safe harbors to calculate affordability
- This rule only applies if the employer HRA contribution amount is required or determinable within a reasonable time before the employee must decide whether or not to enroll in the employer-sponsored plan.
- Employer flex credit contributions to a cafeteria plan can be used to reduce the employee contribution amount for purposes of determining affordability only if the flex credits or dollars can only be used for payment of medical coverage and care.
- Such “health flex contributions” cannot be cashed-out.
- Non-health flex contributions” (e.g., used towards dependent care accounts and group term life insurance) cannot be used to reduce employee contribution amounts. Therefore, employers seeking to use flex credits and dollars toward the calculation of affordability must restrict use of some or all of the flex credits and dollars as well as prohibit cash-out options.
- Transition relief is available for coverage beginning before January 1, 2017, whereby employer flex contributions that are not health flex contributions because it may be used for non-health benefits (including non-taxable benefits and/or cash or another taxable benefit), but that may be used by the employee toward the amount the employee is otherwise required to pay for the health coverage, will be treated as reducing the amount of an employee’s required contribution.
- This relief is not available with respect to a flex contribution arrangement offering non-health benefits that is adopted after December 16, 2015, or that substantially increases the amount of the flex contribution after December 16, 2015 (a “non-relief-eligible flex contribution arrangement”).
- Solely for plan years beginning before January 1, 2017, an employer may reduce the amount of the employee’s required contribution by the amount of a non-health flex contribution (other than a flex contribution made under a non-relief-eligible flex contribution arrangement) for purposes of information reporting under § 6056 (line 15 of Form 1095-C).
- Opt-out payments available only when declining coverage will be added to the employees’ contribution for purposes of determining affordability.
- The IRS is requesting comments on this issue and this rule is not effective until subsequent regulations are released. However, for purposes of eligibility for a subsidy in the exchange, taxpayers may treat unconditional opt-out payments as increasing the employee’s contribution and calculating affordability.
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