By Todd Martin, JD and
Ric Joyner CEO of eflexgroup.com
Employers have included programs for reimbursement of premiums of individual insurance policies in cafeteria plans for many years. Under code section 125(f) individual policies that qualify as accident and health coverage or group term life insurance coverage are considered qualified benefits that can be reimbursed under a cafeteria plan.
Premium Reimbursement Arrangements (“PRA”) are set up as a separate component (FSA) of a cafeteria plan. These FSAs for qualified insurance premiums can be included as a separate Flexible Spending Account in or alone with other FSAs such as; Dependent Care, Health Expenses not covered by insurance. Each FSA has a separate IRS code that merges into a “plan” that offers employees choice of benefits. Each FSA can only reimburse for the type of code section is used to pre-tax or salary reduce an employee election. For example, section 105(b-h) is used to reimburse medical expenses not covered by insurance up to ACA limit of $2,500. Dependent Care FSA comes from IRS code section 129. PRA FSA derives from Revenue Ruling 61-146 and was formally codified in the new section 125 rules put forth in 2007.
Questions have been raised as to the impacts of the Patient Protection and Affordable Care Act on PRAs.
(1) Limitation on Qualified Benefits
Section 1515 of the Affordable Care Act states:
SEC. 1515. OFFERING OF EXCHANGE-PARTICIPATING QUALIFIED HEALTH PLANS THROUGH CAFETERIA PLANS.
(a) In General- Subsection (f) of section 125 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:
(3) CERTAIN EXCHANGE-PARTICIPATING QUALIFIED HEALTH PLANS NOT QUALIFIED-
(A) IN GENERAL- The term `qualified benefit’ shall not include any qualified health plan (as defined in section 1301(a) of the Patient Protection and Affordable Care Act) offered through an Exchange established under section 1311 of such Act.
(B) EXCEPTION FOR EXCHANGE-ELIGIBLE EMPLOYERS- Subparagraph (A) shall not apply with respect to any employee if such employee’s employer is a qualified employer (as defined in section 1312(f)(2) of the Patient Protection and Affordable Care Act) offering the employee the opportunity to enroll through such an Exchange in a qualified health plan in a group market.
Comment: This means that individual insurance purchased through a qualified exchange (government or state) is no longer considered “qualified” to be tax free benefit under Section 125. In other words, PRAs were closed down in section 1515 for individual insurance purchased in a qualified exchange but not for group insurance. The assumption is that since employees were getting a government subsidy for insurance, also receiving tax free status in an FSA (PRA) could create double dipping.
(b) Conforming Amendments- Subsection (f) of section 125 of such Code is amended–
(1) by striking `For purposes of this section, the term’ and inserting `For purposes of this section–
(1) In General- The term, and
(2) by striking `Such term shall not include’ and inserting the following:
(2) LONG-TERM CARE INSURANCE NOT QUALIFIED- The term `qualified benefit’ shall not include’.
(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2013.
Comment: PRAs can still be used outside of the exchange and within the exchange for group premiums.
On this basis, any individual coverage of a qualified health plan purchased by an individual through an Exchange established under the Affordable Care Act can no longer be reimbursed by a PRA. Other individual policies that are accident and health coverage or group term life insurance coverage described in 125(f) would still be considered qualified benefits under a cafeteria plan.
Comment: Premiums for dental, vision, and supplemental coverage that are qualified under section 213d are reimbursable through a PRA.
(2) Group Health Plan Mandates
Programs providing for reimbursement of health insurance premiums through a PRA have been subject to debate about the potential impacts of health plan mandates under ERISA, HIPAA and COBRA. If the program were considered a covered group health plan under these laws, there are potential compliance challenges to meeting the requirements of these laws in a PRA. In some respects, the Affordable Care Act reduces risk under HIPAA related to claims that the plans are discriminatory on the basis of health factors because ACA removes medical underwriting from the issuance of medical plans. There may also be a new environment relating to state small group rules that have also been an issue for individual health premium reimbursement programs. (Some states have held that if 2 employees from the same employer are covered by a plan paid for by an individual reimbursement program, the policies become subject to the small group reform rules.)
The Affordable Care Act adds additional issues to consider for these programs. To the extent a program is treated as an employer group health plan under the Affordable Care Act, it potentially becomes subject to mandates, including mandates prohibiting certain annual and lifetime limits on benefits. These mandates are potentially inconsistent with reimbursement benefits that, by their nature, limit benefits to the specified amounts provided in the plans. Treatment as a group health plan under the Affordable Care Act generally follows a similar analysis as treatment as under HIPAA.
Where a PRA is reimbursing only benefits excluded from the Affordable Care Act mandates, the PRA would avoid potential compliance issues with these mandates. Exclusions are available for excepted benefits such as limited scope dental or vision or retiree only plans. Exemption may also be available for plans that qualify under the DOL safe harbor for voluntary plans. Another potential argument for exemption is application of the Affordable Care Act exemption for plans that qualify as a “flexible spending arrangement” described in section 106(c)(2) of the Internal Revenue Code. This section states:
(2) Flexible spending arrangement
For purposes of this subsection, a flexible spending arrangement is a benefit program which provides employees with coverage under which –
(a) specified incurred expenses may be reimbursed (subject to reimbursement maximums and other reasonable conditions), and
(b) the maximum amount of reimbursement which is reasonably available to a participant for such coverage is less than 500 percent of the value of such coverage. In the case of an insured plan, the maximum amount reasonably available shall be determined on the basis of the underlying coverage.
While it is clear that a flexible spending account plan cannot reimburse individual premiums, it is possible that the exclusion from the Affordable Care Act under section 106(c)(2) of the code would be interpreted more broadly to include a PRA program, provided that the program complies with the conditions listed in that section. There is also the argument that these programs should not ever qualify as an employer group health plan.
Plans should carefully monitor guidance issued under the Affordable Care Act in this area and discuss with their legal advisors the options and risks associated with these programs. This is an area that is rapidly developing and this changing environment will be continuing as the Affordable Care Act is implemented.
Todd Martin, JD Todd Martin Law—Ric Joyner, MBA, CEBS, GBA, CFCI eflexgroup.com ©
Permission is granted to use this material in an educational format as long as credit is given to the authors, but cannot be used for profit purposes.
Todd Martin: firstname.lastname@example.org 608-318-8978
Ric Joyner: email@example.com 608-268-4770