Latest ACA Guidance Addresses HSAs, HRAs, and Wellness Programs

This article from Spencer Fane Britt and Browne, LLP is a good summary of the latest clarifications in this area – Reeve

Relevant Play-or-Pay Requirements

In general, an employee who is eligible for employer-sponsored health
coverage will not qualify for this tax credit unless that employer
coverage is either not “affordable” (because the employee’s share of the
premium for employee-only coverage would exceed 9.5% of his or her
income) or fails to provide at least “minimum value” (by covering the
cost of at least 60% of “essential health benefits”).  This means that a
large employer may avoid the play-or-pay penalties by demonstrating
that its coverage satisfies both the affordability and the minimum value requirements.

In making these two demonstrations, employers may wonder whether certain types of payments that are related
to a health plan may be considered.  These proposed IRS regulations
address the treatment of the following three types of employer payments:

  • Contributions employers make to their employees’ health savings accounts (“HSAs”);
  • Amounts that employers credit to their employees’ accounts under health reimbursement arrangements (“HRAs”); and
  • Monetary rewards provided to employees who satisfy the requirements of a wellness program.

This recent IRS guidance is summarized in the following chart:

 

Treatment of HSAs, HRAs, and Wellness Programs Under “Affordability” and “Minimum Value” Standards
  Affordability? Minimum Value?
Current-Year Employer HSA Contribution N/A (HSA may not be used to pay premiums) Yes
Current-Year
HRA Credit1
Yes, if amounts may be used to pay premiums or medical expenses Yes, but only if amounts may not be used to pay premiums
Wellness Program Incentive2 – Tobacco Usage Yes, if reward = premium reduction (or avoidance of premium surcharge) Yes, if reward = reduced cost-sharing
Wellness Program Incentive2 – Other No3 (i.e., must assume employee will fail to satisfy program requirements) No3 (i.e., must assume employee will fail to satisfy program requirements)
 

1 HRA must be integrated with eligible employer-sponsored health plan.

 

2 Wellness program must satisfy HIPAA nondiscrimination requirements.

3 Exception: For plan years beginning before January 1, 2015, incentives under any
nondiscriminatory wellness program may be considered if a program was
in effect on May 3, 2013, and an employee is in a category that was
eligible to participate in the program on that date.

In
addition to the information set forth in this chart (including its
footnotes), employers should keep the following information in mind.

HSA Contributions

Because
amounts held in an HSA may not be used to pay insurance premiums, HSAs
do not enter into the affordability analysis.  However, any current-year employer HSA contributions may be used to show that the employer’s health plan satisfies the 60% minimum-value threshold.

HRA Credits

In
analyzing current-year credits to an HRA, the key question is whether
the HRA document allows those amounts to be used to pay premiums under
the employer’s health plan.  If so, the employer may use those credits
to help show that its plan is affordable (but may not use them in the minimum value analysis).  By contrast, if the HRA is limited to the reimbursement of medical expenses
– and does not allow for the payment of premiums – the employer HRA
credits may be applied toward the 60% minimum value threshold.

Wellness Programs Incentives

The
proposed regulations divide wellness programs into two major categories
– those that are designed to prevent or reduce tobacco usage, and all
other programs.  For both affordability and minimum value
purposes, an employer may assume that all employees either do not use
tobacco or have successfully completed whatever alternative is made
available to tobacco-users.  Thus, if the wellness program provides a
premium discount to non-tobacco-users, the discounted premium amount may
be considered when conducting the affordability analysis.  Similarly,
any cost-sharing reduction granted to non-tobacco users (such as lower
deductibles, co-payments, or co-insurance) may be considered when
applying the minimum value standard.

Except as provided in the following paragraph, other wellness programs – those having nothing to do with tobacco usage – must be treated in exactly the opposite fashion.  That is, the employer must assume that employees will fail
to receive the wellness program reward.  Thus, any premium discount
must be disregarded when conducting the affordability analysis, as must
any cost-sharing reductions when testing for minimum value.

There
is an important exception to these wellness program rules for plans
years beginning before January 1, 2015.  For this limited period of
time, an employer may assume that all employees qualify for any reward
made available under any HIPAA-compliant wellness program – including
those having nothing to do with tobacco usage.  In essence, for the 2014
plan year, all wellness programs may be treated in the same way as
tobacco-related programs for purposes of both the affordability and
minimum value requirements.

Conclusion

In
most cases, it will be obvious whether an employer health plan
satisfies the minimum value requirement (at least to any insurer that
underwrites the plan), so this recent IRS guidance may not be all that
important for that purpose.  On the other hand, employers that wish to
minimize their share of their employees’ health premiums – while still
satisfying the affordability requirement – may want to take credit for
their HSA contributions, HRA credits, or wellness program rewards.
Those employers should pay particular attention to that aspect of these
regulations.