Are HRAs on the chopping block under PPACA?

As the drama of the fiscal cliff negotiations fades, the reality of the impending deadline for full implementation of the Patient Protection and Affordable Care Act (PPACA) has begun to set in with many clients. Even those clients with full healthcare coverage are likely wondering how PPACA will impact the health arrangements they already have. Health Reimbursement Arrangements (HRAs) are popular tools for clients looking to fund medical expenses through tax-preferred vehicles, as well as for small business clients who see HRAs as a way to offer their employees access to health coverage without entering the insurance market themselves. Despite their popularity, HRAs are one type of health insurance vehicle that may be on the chopping block with the dawn of PPACA.

HRAs: The basics

HRAs are tax-preferred accounts offered by an employer in which the employer promises to reimburse an employee’s annual medical expenses up to a certain fixed dollar amount, with unused amounts carried forward to future years. HRAs can be offered in conjunction with another health plan — in fact, they are frequently offered to supplement high deductible health plans that provide minimal coverage — or they can be offered as stand-alone arrangements.

Employers often offer HRAs to employees instead of more comprehensive health insurance coverage because it allows them to determine the exact level of expense they will incur for employee health benefits, eliminating the fear that the cost of insurance benefits will increase over time.

Employees — especially relatively healthy employees — often find HRAs attractive because they allow the employee to determine how to spend funds allocated for medical care (funds placed into an HRA can be used to pay for health insurance premiums, prescription medications, or other medical supplies and expenses). Perhaps most importantly, the employee is not taxed on the reimbursed amounts as long as the funds are used to pay for qualified medical expenses.

PPACA's impact

PPACA generally prohibits health plans that impose annual limits on what are considered to be essential health benefits. This prohibition impacts HRAs because, by definition, the coverage provided under an HRA is limited by the employer’s annual contribution amount.

While final guidance on whether HRAs will be subject to the rules prohibiting annual limits on essential health benefits has not yet been issued, the IRS recently released FAQs that suggest that HRAs will not entirely escape.

The FAQs suggest that integrated HRAs may not be subject to the prohibition if offered in conjunction with a health insurance plan that otherwise satisfies PPACA’s requirements and the HRA option is offered only to employees eligible to participate in that plan. The FAQs also indicate that HRAs used by employees only for payment of expenses for non-essential health benefits may also continue to be permitted (if, for example, the employee’s health insurance plan covers expenses related to all essential health benefits). HRAs that are offered only to retirees should also remain permissible.

So-called stand-alone HRAs, however, will likely violate PPACA rules if they are operated in accordance with current standards that allow the employee to choose to spend his limited reimbursable HRA funds on any qualified medical expense.

Conclusion

While final guidance has yet to be issued, the preliminary guidance signals that the use of HRAs by employers who do not otherwise offer traditional health insurance may be prohibited when PPACA becomes fully effective in 2014. Because of this, small business owner clients and their employees should begin preparing to lose a valuable tool that provided flexible health benefits before PPACA.

For previous coverage of changes to expect under the Affordable Care Act in Advisor’s Journal, see Changes Affecting Business in the 2010 Health Reform Law.

For in-depth analysis of health reimbursement arrangements, see Advisor’s Main Library: B3—Health Reimbursement Arrangements (HRAs).

Your questions and comments are always welcome. Please contact the Panel of Experts.

About the Author
Robert Bloink

Robert Bloink

This article is excerpted from Tax Facts Online, where Robert Bloink serves on the Editorial Advisory Board. Mr. Bloink is also co-author of "2013 Tax Facts on Insurance & Employee Benefits," published by The National Underwriter Co. Mr. Bloink is a professor of tax for the Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law. He has served as senior attorney in the IRS Office of Chief Counsel and has been recognized as an expert in the taxation of financial structured products and was responsible for the IRS’ first FSA addressing variable forward contracts. Mr. Bloink’s core competencies led to his involvement in prosecuting some of the biggest corporate tax shelters in U.S. history.

Email: rbloink@nationalunderwriteradvancedmarkets.com 

About the Author
William H. Byrnes

William H. Byrnes

William Byrnes is the leader of Summit Business Media's Financial Advisory Publications, having been appointed July 1, 2010. He has been an author and editor of ten books and treatises and seventeen chapters for Lexis-Nexis, Wolters Kluwer, Thomson-Reuters, Oxford University Press, Edward Elgar, and Wilmington, as well as numerous commissioned, peer-reviewed, and law review articles. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, which subsequently amalgamated into PricewaterhouseCoopers, practicing in Africa, Europe, Asia, and the Caribbean.

He has been commissioned and consulted by a number of governments on their tax and fiscal policy from policy formation to regime impact. He has served as an operational board member for companies in several industries including fashion, durable medical equipment, office furniture, and technology. Since 1994, he has been a professional trainer for professional association conferences, government workshops, and financial service institutions in-house meetings.

Before Associate Dean Byrnes joined the administration of Thomas Jefferson School of Law, he was a tenured law faculty member at St. Thomas School of Law. He serves on the Academic Committee of the American Academy of Financial Management. He created the first online graduate program offered to wealth managers and life insurance producers without any legal background—see http://llmprogram.tjsl.edu (Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law).

Email: wbyrnes@nationalunderwriteradvancedmarkets.com

Originally published on National Underwriter Advanced Markets. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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