Warning! Those that wanted to drop group insurance coverage and use a Premium Reimbursement Arrangement (PRA) or Health Reimbursement Arrangement (HRA) to write individual coverage are dealt a blow in this notice. PRAs in Section 125 are now AFTER TAX versus PRE-TAX!
Application of Market Reform and other Provisions of the Affordable Care Act to HRAs, Health FSAs, and Certain other Employer Healthcare Arrangements
By Ric Joyner, MBA, CEBS, GBA, RPA, CFCI
This notice is intended to stop the practice of employers dropping group coverage and moving to individual coverage. Kevin Knopf, (Treasury on loan to IRS) today in a verbal conversation with me at @3.30pm EST stated that now the PRA can ONLY allow after-tax offerings for premiums! This effectively stops the use of a pre-tax PRA. However, from a practical standpoint, employers may want to drop coverage regardless of pre-tax status of the PRA, and give employees money into an account they can draw from to pay premiums, but this will be an after-tax PRA. The employer could still save greatly in premium dollar costs.
But Premium Only Plans (POP) still remains “ok” in the notice. A premium only plan is the employee’s portion of their group premiums moved through payroll mechanics to become tax free. I don’t think the IRS, DOL, HHS (see bottom of notice) realize the giant can of worms they opened. Or they do and this is coming from the administration which sponsored ACA.
Can we also thank organizations that have thumbed their nose at the regulators and carried on a practice that was prohibited, such as HRAs reimbursing individual premiums? Did a small group of people ruin the pre-taxing of individual insurance for many thousands or millions potentially? Maybe or maybe not.
Let’s look at an example of what I am referencing on the application of a PRA or HRA:
Example, if an employer wants to drop group coverage and have employees purchase individual policies, this can only be offered after-tax in a Premium Reimbursement FSA (aka PRA under RR 61-146). Kevin Knopf; “No it must be after-tax now.”
B. Employer Payment Plans
Revenue Ruling 61-146 holds that if an employer reimburses an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance, the payments are excluded from the employee’s gross income under Code § 106. This exclusion also applies if the employer pays the premiums directly to the insurance company. An employer payment plan, as the term is used in this notice, does not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage. Individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan, if the standards of the DOL’s regulation at 29 C.F.R. §2510.3-1(j) are met. Page 2
1. Application of the Market Reform Provisions to HRAs and Certain other Employer Healthcare Arrangements Question 1: The HRA FAQs provide that an employer-sponsored HRA cannot be integrated with individual market coverage, and, therefore, an HRA used to purchase coverage on the individual market will fail to comply with the annual dollar limit prohibition. May other types of group health plans used to purchase coverage on the individual market be integrated with that individual market coverage for purposes of the annual dollar limit prohibition? Answer 1: No. A group health plan, including an HRA, used to purchase coverage on the individual market is not integrated with that individual market coverage for purposes of the annual dollar limit prohibition. For example, a group health plan, such as an employer payment plan, that reimburses employees for an employee’s substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. However the employer payment plan will fail to comply with the annual dollar limit prohibition because (1) an employer payment plan is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement, and (2) an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement. Page 6
When does it go into effect? The next plan year in 2014. That is why there is still time to get relief from this new notice.
What is interesting about this change in event, is that Todd Martin and I think this can be challenged There exists plenty of law that says PRAs can be used for pre-taxing medical coverage according to IRS Section 213d and RR 61-146 for group premiums. For whatever reason, IRS/DOL/Administration is targeting the use of HRAs and PRAs to stop the move of employers in dropping group coverage to go to individual policies for employees. This notice is timed to prevent the use of pre-tax dollars when employers are starting their enrollment season.
The impact of community rating on group insurance is hitting employers hard. And the use of a pre-tax PRA was a viable option and tool to alleviate some of the costs to both the employer and employees. This tool is removed. Why? What purpose and benefit does it serve? These are questions for us to go back to our representatives in DC and get explanations. Just as the news last week was that ACA is not the concern for employers it once had been the loss of pre-taxing individual health insurance may just bring this back to the forefront. This is potentially devastating to small businesses that may just drop coverage now and not offer any solutions to employees for the relief of skyrocketing premiums. Is this notice potentially creating MORE uninsured? Can this stand a challenge because employers all over the country, agents and the markets are moving in this direction for small companies? eflex lives in the larger group space so this wasn’t a priority, but our customers and brokers who do this work are impacted severely.
It is time to get your lobbying pants on. If you have never lobbied and visited your representatives to raise heck the time is now. Go to, www.house.gov and www.senate.gov to find your representative and to place a call or schedule a visit. Believe me, calling, visiting and writing does get results. And your representative may want to hear about this “abuse of power”. I say that with tongue in cheek, but indeed, some may consider it so.
Premium Reimbursement Arrangement: Created from Revenue Ruling 61-146 and is a type of Flexible Spending Account that allows employees to salary reduce for premiums which are IRS Section 213d qualified; group, or individual but paid for at home in most cases. These premiums can be anything for health; COBRA, medicare, supplemental coverage, spouses insurance policy, for example.
Health Reimbursement Arrangement: Created from Notice 2002-43,43 that creates the ability for the employer to fund an account for the employees that include; insurance related premiums or medical expenses both defined under IRS Section 213d.