Excepted Benefit HRAs: A Compliance Overview for Employers

By: HUB’s EB Compliance Team

Last month, HUB wrote about Excepted Benefit HRAs (EBHRA). EBHRAs are employer-funded health reimbursement arrangements that allow employers to reimburse employees, on a tax-free basis, for certain out-of-pocket medical expenses and premiums for excepted benefit coverage. The “excepted benefit” part of an EBHRA is important because this frees the HRA from being subject to certain compliance requirements applicable to traditional group health plans or traditional group health plan HRAs. There are, however, compliance requirements that still apply to EBHRAs, which this piece will discuss.

ERISA

Although the EBHRA enjoys relief from many ACA and HIPAA portability requirements, it remains subject to the Employee Retirement Income Security Act of 1974 (ERISA) as a welfare benefit plan, unless a specific exemption applies (such as for church or government plans). Being subject to ERISA carries several practical obligations:

Plan Document. The EBHRA is a welfare benefit plan under ERISA, which requires the plan to be established and maintained pursuant to a written instrument (i.e., the plan document). The plan document must address the plan's terms, administration, eligibility, benefits, claims procedures, amendment and termination provisions and COBRA rights. There is no small-employer exception to ERISA's plan document requirement.

Summary Plan Description (SPD). The employer must furnish an SPD to each participant, regardless of plan size. The SPD must meet ERISA's detailed content requirements and be written in a manner calculated to be understood by the average participant. The SPD describes the benefits under the plan.

Form 5500 Reporting. As HUB previously wrote about, group health plans with 100 or more participants at the beginning of the plan year must file Form 5500 for that year. Therefore, EBHRAs may trigger Form 5500 filing requirements depending on participant count and plan structure. Since EBHRAs are self-insured and generally unfunded (i.e., paid from the plan sponsor’s general assets), a standalone EBHRA with fewer than 100 participants would generally be exempt from filing a 5500. However, if the EBHRA is included in a wrap plan with other benefits that together exceed 100 participants, the wrap plan triggers the filing obligation, even for the EBHRA.

Other compliance requirements

HIPAA privacy and security. Because the EBHRA is a self-insured group health plan, it is a HIPAA-covered entity to the extent it creates, receives, maintains, or transmits protected health information (PHI). An employer offering an EBHRA must therefore maintain HIPAA privacy policies and procedures, including a Notice of Privacy Practices.

Nondiscrimination. As a self-insured health plan, the EBHRA is subject to the nondiscrimination requirements under 26 U.S. Code § 105(h). These rules prohibit discrimination in favor of highly-compensated individuals (HCI) with respect to both eligibility and benefits. If the plan is discriminatory under this definition, excess reimbursements to HCIs become taxable income.

Employers may offer different EBHRA terms to different classes of employees, but only if those classes are defined by bona fide employment-based criteria consistent with HIPAA's similarly-situated individual rules (e.g., full-time vs. part-time, geographic location, date of hire, collective bargaining status).

COBRA considerations

The EBHRA provides excepted benefits, but it is still a group health plan subject to COBRA. This means employers that are subject to COBRA (those that employed 20 or more employees on more than 50 percent of the employer's typical business days during the preceding calendar year) must offer continuation coverage to qualified beneficiaries following an applicable qualifying event.

The COBRA premium for the EBHRA is calculated separately from the underlying group medical plan, using the actuarial method or the past-cost method, noted under IRS Notice 2002-45 and 26 U.S. Code § 4980B(f)(4).

Conclusion

Although EBHRAs have fewer compliance obligations as compared to traditional HRAs, employers should not mistake "excepted benefit" for "compliance-free." The EBHRA carries meaningful obligations under ERISA, COBRA, HIPAA privacy and the nondiscrimination rules, and proper plan documentation and administration are essential to maintaining compliance with the applicable regulations.

If you have any questions, please contact your HUB advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on HUB International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect, and HUB International does not have an obligation to update this information. You should consult an attorney, accountant or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.