The Effect of Employer HRA Contributions, Flex Contributions &Unconditional Opt-Out Payments on Affordability under ACA
At the end of 2015, the IRS issued Notice 2015-87, which provides a variety of guidance on ACA-related issues in a question-and-answer format. The focus of this article will be on three of those areas of guidance that impact the determination of health care affordability. For this purpose, “affordability” is one of the requirements that an employer’s offer of group health coverage must meet for the employer to avoid potentially applicable penalties under Code Section 4980H(b). Affordability is determined based upon the employee’s required contribution towards the cost of group health care coverage as a percentage of household income. Because employers generally do not have information regarding an employee’s household income, they may elect to use one of three safe harbors, which use an employee’s wages, rather than household income to measure affordability.
This article will summarize the guidance provided by the Notice on the following types of employer contributions and payments to employees and how they count in the determination of whether an offer of coverage is affordable for an employee:
Health reimbursement arrangement (HRA) contributions;
Flex contributions (also known as “flex credits”) to a cafeteria plan; and
Payments to employees who waive employer-sponsored group health coverage (called “opt-out payments”).
HRA Contributions (Q&A-7): Employer contributions to an HRA for the current plan year will be treated as reducing the employee’s required contribution, if the following conditions are met:
The contributions must be available to pay for:
Premiums for an eligible employer-sponsored plan; or
Premiums for an eligible employer-sponsored plan and also cost-sharing and/or other health benefits not covered by the plan;
The HRA must be integrated with an eligible employer-sponsored group health plan (as defined in Notice 2013-54); and
The employer’s annual contribution to the HRA must be required under the terms of the HRA, or be determinable before the employee must make a decision as to whether to enroll in the eligible employer-sponsored plan.
If these conditions are met, then an employer contribution to an employee’s HRA will be treated as reducing the employee’s required contribution as though the contribution is made ratably for each month of the period. For example, if an employer contributes $1,200 for a 12-month plan year to an HRA that meets the requirements described above, the employee’s required contribution will be treated as reduced by $100 per month ($1,200 divided by 12 months).
Flex Contributions (Q&A-8): Some employers provide flex contributions under a cafeteria plan, which amounts are available to employees to spend on benefits provided through the cafeteria plan. These amounts maybe used to make pre-tax premium payments for medical, dental, vision, life, disability or other insurance permitted to be offered through a cafeteria plan, or contributed to flexible spending accounts for health care and dependent care expenses. In some cases, after-tax benefits can be offered under a cafeteria plan. Options will vary with the employer’s plan design, including whether unused flex contributions are forfeited or can be cashed out.
In order for a flex contribution to reduce an employee’s required contribution for purposes of determining affordability, the contribution must be a health flex contribution. A health flex contribution meets the following requirements:
The employee must not be able to use the flex contribution towards taxable benefits (including a cash option);
The employee must not be able to use the flex contribution to pay for any benefit other than for medical care; and
The employee must be able to use the flex contribution to pay for minimum essential coverage.
The Notice provides transitional relief for certain flex contribution arrangements that do not meet either the first or the second of these requirements, solely for plan years beginning before January 1, 2017 and solely for purposes of Code Section 4980H(b). If the requirements for the transition relief are met, flex contributions can be counted towards affordability as long as the flex contribution arrangement was adopted on or before December 16, 2015 and the amount of the flex contribution has not been substantially increased after December 16, 2015. Another transition rule applies for information reporting purposes under Code Section 6056.
Unconditional Opt-Out Payments (Q&A-9): Some employers offer employees who decline or waive coverage under the employer’s group health plan a taxable payment to compensate the employees for benefits they are not receiving under the employer’s plan. These payments, which are called “opt-out payments”:
Cannot be used to pay for coverage under the employer’s plan; and
Are available only if the employee declines or waives coverage under the employer’s health plan.
When an opt-out payment is unconditional (meaning that there are no conditions other than the condition that the employee decline coverage), it will be treated as increasing the employee’s required contribution, and will therefore negatively affect the affordability determination. The IRS views an opt-out payment as an additional cost to the employee –that is, an amount that the employee must forego in order to elect coverage. For example, if an employer offers coverage through a cafeteria plan and an employee is required to contribute $200 per month for self-only coverage, but if the employee waives coverage he could receive an opt-out payment of $100 per month, the employee’s required contribution would be $300 per month ($200 for the salary reduction plus $100 in an opt-out payment that the employee elects to forego when he elects coverage). The Notice provides that the government intends to issue regulations that will reflect the rule as described above effective for periods after December 16, 2015 with respect to arrangements adopted after December 16, 2015. This means that, at least for plan years beginning before 2017, unconditional opt-out payments will not be treated as increasing the employee’s required contribution for purposes of the affordability determination as well as reporting on Form 1095-C, provided the unconditional opt-out arrangement was adopted on or before December 16, 2015.
The Notice distinguishes between unconditional opt-out payments and opt-out payments that are conditioned on the employee satisfying some other meaningful requirement related to the provision of health care to employees, such as requiring proof of coverage under a spouse’s employer’s plan. The Notice suggests that the treatment of conditional opt-out payments under the proposed regulations to be issued may be different from that of unconditional opt-out payments. For now, however, the Service has elected not to take a position on conditional opt-out payments.
New Claims Procedures for Disability Claims on the Horizon
The Department of Labor (the “DOL”) has proposed new disability benefit claims procedure rules designed, in the words of the DOL, to “uplift” the current rules to “better align” with procedural safeguards and protections of the Affordable Care Act (“ACA”). Once the final new rules become final, the following changes will be required to all ERISA plans that provide a disability benefit (including plans for which disability benefits are ancillary, such as qualified retirement plans and non-qualified deferred compensation plans):
Independence/Impartiality: Claims procedures must ensure that independent and impartial decision-makers adjudicate claims and appeals.
- Plan may not hire, compensate or terminate claims adjusters/medical experts “based upon the likelihood that the individual will support the denial of benefits.”
Full Discussion in Decisions: Claims denials notices must contain a full discussion of the basis of decision and the standards behind the decision.
- The denial notice, among other things, must explain why the decision maker did not follow or agree with the views of the claimant’s health care professionals or the decision of other “payers of benefits” in favor of the claimant such as a Social Security Administration decision.
Full Access to Claims File: Claims procedures must give a claimant full access to the plan’s entire claim file and the right to present evidence and testimony as part of the claims and appeals process.
Full Opportunity to Be Heard on Appeal: Claims procedures must provide that before the plan may issue a decision on appeal, a claimant is provided free of charge any new evidence and/or any new rationale developed by the plan within a reasonable time period and provide a reasonable opportunity for the claimant to respond.
Deemed Exhaustion of Administrative Remedies: Claimants will be deemed to have exhausted administrative remedies (and therefore be entitled to initiate a lawsuit) if the plan fails to comply with the claims processing rules unless the failure was (i) de minimis; (ii) non-prejudicial; (iii) attributable to good cause or matters beyond the plan’s control; (iv) in the context of ongoing good-faith exchange of information; and (v) not reflective of a pattern or practice of noncompliance.
Rescission as Claims Denial: Certain rescissions of coverage (but not a rescission for failure to pay premiums) must be treated as a denial that is subject to the plan’s appeals procedures.
Culturally and Linguistically Appropriate Notices:All decisions must be written in a “culturally and linguistically appropriate manner” which means, among other things, that a Plan must provide, upon request, a notice in any applicable non-English language (in a county where at least ten percent of residents are literate only in a non-English language.)
The proposed rules may be found Here. The comment period for the proposed rules ended in January and the final rules will take effect 60 days after they are published in the Federal Register. Plan Sponsors should be on the lookout for the final rules and make sure that your plan claims procedures are updated to reflect them.
DOL New Fiduciary Rule
The Department of Labor (DOL) announced the long awaited fiduciary rule on Wednesday, April 6th. First proposed in 2010 by the DOL, the new regulation and related guidance creates a new, broader definition of plan fiduciary.
We will provide a full analysis of the new regulation and related guidance in our upcoming May newsletter. In the meantime, to view the regulation, which is available from the Department of Labor, as well as updated exemptions, click the links below.
Updated 2017 Out of Pocket Maximums
The Center for Medicare and Medicaid Services (CMS) recently announced the new out of pocket maximums on cost sharing in 2017.For self-only coverage the maximum out of pocket for 2017 is now $7,150and $14,300 for family coverage.See the link below to view the Notice from CMS.Final HHS Notice of Benefit and Payment Parameters for 2017
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