PPACA Guidance Clarifies Rules for HRAs, Health FSAs, and Other Accountable Plans

By Catherine Creech, J.D., and Helen Morrison, J.D., Washington, D.C.

Editor: Michael Dell, CPA

Employee Benefits & Pensions

In Notice 2013-54, the IRS provided long-anticipated guidance on when employers may use arrangements such as a health reimbursement arrangement (HRA) or a health flexible spending arrangement (health FSA) to provide employees with a fixed amount to pay for health care premiums and other eligible medical expenses.

In an effort to manage health care costs and provide employees with a choice of health care options, employers increasingly are considering plan designs that provide employees with a fixed amount that may be used at the employee’s discretion either to purchase coverage or to reimburse medical care expenses. Notice 2013-54 sets parameters for when this type of fixed-dollar arrangement complies with the health care market reform provisions of the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, and therefore is a permissible employee benefit program. Generally, the notice precludes employers from maintaining an HRA, health FSA, or other type of tax-free reimbursement arrangement that may be used to pay for or reimburse premiums for health insurance on the individual market (including the health care exchanges). Under the guidance, an HRA is viable only if it is integrated with a non-HRA employer-provided group health plan.

Notice 2013-54 also addresses when an employee-assistance program (EAP) is considered an “excepted benefit” and, therefore, is not subject to the PPACA market reform rules. Employers that maintain an EAP may have been concerned that unless an exception was provided, they would need to terminate the program because it would fail to comply with the market reform rules. Notice 2013-54 provides employers with a broad definition of EAPs that are treated as excepted benefits. This guidance should generally be welcomed because it provides for greater flexibility at least through 2014.

The Departments of Labor (DOL) and Health and Human Services (HHS) also issued substantially similar coordinating guidance. (Collectively, Treasury/IRS, DOL, and HHS are referred to as the Departments.)


The purpose of the notice is to provide additional guidance on the application in 2014 of the PPACA market reform rules and, in particular, the provisions in PPACA providing that a group health plan with two or more active participants must not (1) impose any annual dollar limit on “essential health benefits” or (2) fail to provide certain preventive services without imposing any cost-sharing requirements. These market reform rules arise under the Public Health Service Act (PHSA), as amended by PPACA, and are incorporated into the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. For federal tax purposes, failure to comply with the market reforms results in an excise tax under Sec. 4980D, which is $100 per day per affected participant.

The notice addresses several types of employer medical reimbursement arrangements including HRAs, health FSAs, and employee payment plans under which an employer pays directly or reimburses an employee for premiums for health care coverage purchased in the individual market. The notice also addresses EAPs.

HRAs generally are unfunded arrangements maintained by an employer to reimburse eligible employees’ medical expenses, including health care premiums. Under IRS administrative guidance (Notice 2002-45), HRA balances may be carried over from year to year. An HRA is funded exclusively by the employer; it may not use employee salary reduction contributions.

A health FSA is designed to reimburse employees’ medical expenses other than health care premiums. A health FSA typically is offered through a cafeteria plan in which employees elect salary reduction contributions (limited to $2,500 in 2013 and later years) and to which employers may make additional contributions if they choose. Health FSAs are subject to the rules of Sec. 106(c) and in the past have not allowed carryover of unused balances from year to year (subject to specific grace period rules). (Under guidance issued in late October (Notice 2013-71), cafeteria plans can be amended to allow health FSAs to carry over $500 into the next plan year.)

Although a health FSA is a group health plan within the meaning of Sec. 9832(a), it may be considered as providing only excepted benefits if (1) other group health plan coverage, not limited to excepted benefits, is made available to the employees, and (2) the health FSA is structured to limit reimbursements to two times the amount of the employee’s salary reduction contributions for the year (or, if greater, $500 plus the salary contributions for the year).

An EAP is not a defined term under the Code, but, generally, it refers to a program offered by employers that assists employees in addressing life and family issues, including by counseling and referrals. As discussed here, the EAPs offered by many employers may include certain services that constitute medical benefits and, thus, raise the question of how the PPACA market reform rules apply to those arrangements.

Prior guidance on these arrangements has been issued in interim final regulations addressing the PPACA annual dollar limit prohibition (75 Fed. Reg. 37188), final regulations under Sec. 5000A defining minimum essential coverage (78 Fed. Reg. 53646), and frequently asked questions (FAQs) issued by the Departments (FAQs Part XI). The prior guidance stated, among other things, that:

  • HRAs covering only retirees are not subject to the PPACA market reform rules because plans with fewer than two current employees are excepted.
  • HRAs “integrated” with other employer-provided primary health coverage would not fail to comply with the PPACA market reform annual dollar limit prohibition, provided that the other group health coverage complied with the annual dollar limit prohibition.
  • An HRA is not treated as integrated with other employer primary health coverage unless the HRA is available only to employees who are actually enrolled in the employer-provided primary group health plan coverage. An employer-sponsored HRA cannot be integrated with individual market coverage.
  • A health FSA, as defined in Sec. 106(c)(2), is not subject to the annual dollar limit prohibition.
  • HRAs, health FSAs, Sec. 125 plans, and employer payment plans are eligible employer-sponsored plans and, therefore, provide minimum essential coverage.

Prior guidance also distinguishes arrangements that are designed solely to provide excepted benefits. Excepted benefits, which are set forth in Sec. 9832(c) (mirroring certain provisions of ERISA and the PHSA), are not subject to the market reform rules. Excepted benefits include accident-only coverage, disability income, limited-scope dental and vision benefits, long-term-care benefits, and certain health FSAs.

Guidance Provided Under Notice 2013-54

Notice 2013-54, which is in FAQ format, addresses the status of the identified employer-provided health care payment or reimbursement arrangements. The notice also clarifies which arrangements are considered minimum essential coverage and how such coverage affects whether an individual, including a retiree, is eligible for a premium tax credit under Sec. 36B to assist in purchasing individual coverage through a health care exchange established under PPACA. The health care exchanges opened on Oct. 1 for an open enrollment period in coverage that is effective beginning in 2014.

The notice provides the following guidance:

“Stand-alone” HRAs: Beginning in 2014, an HRA (other than one limited to reimbursement of excepted benefits) may not be maintained for active employees without violating the market reform rules, unless the HRA is integrated with other group coverage that complies with the market reform provisions. As previously explained, a stand-alone HRA that covers only former employees (retirees) is not subject to the PPACA market reform rules; however, the availability of HRA dollars will constitute minimum essential coverage to those individuals and, as a result, may have other PPACA implications. (See further discussion below concerning ineligibility for premium tax credits to purchase exchange coverage if a person is enrolled in minimum essential coverage.)

An HRA is considered to be integrated with other group coverage only if it is exclusively available to employees who are actually enrolled in a group health plan—either the group health plan offered by the employer or another group health plan (e.g., a plan maintained by the employee’s spouse). An HRA that is integrated with a group health plan that meets the minimum value requirement may be used to reimburse any expense for medical care, as defined under Sec. 213(d). An HRA that is integrated with a group health plan that fails to meet the PPACA minimum value requirement is subject to limitations on reimbursements.

The limitation requires that the HRA be made available to reimburse only expenses for medical care other than medical care that constitutes an essential health benefit (and for co-payments, co-insurance, deductibles, and premiums). Presumably, limiting HRA reimbursements in this manner is intended to prevent an HRA from being used indirectly to impermissibly set an annual dollar limitation on coverage of an essential health benefit.

In all cases, to meet the integration requirement, an HRA must allow employees to opt out or waive (and forfeit) future reimbursements on an annual basis. The waiver and forfeiture provisions are necessary because the HRA constitutes minimum essential coverage and, therefore, may preclude an individual from obtaining a premium tax credit.

Status of existing “stand-alone” HRA dollars: Prior FAQ guidance had indicated that future guidance would clarify how existing HRA credits may be carried over in 2014 and later years if the HRA is not integrated with other group coverage. (The prior FAQ guidance set forth limitations on the credits that could be added to the HRA for periods prior to 2014.) The notice states that if an employee is credited with amounts in an HRA while it was integrated with other group health plan coverage, the employee may continue to use those dollars in later periods even if the employee is no longer covered by the employer group health plan.

The notice refers to the prior FAQ guidance indicating that future guidance would address existing HRA balances. However, the notice does not explicitly set forth a rule that allows pre-2014 credits to an HRA to be used in 2014 and later years without violating the market reform rules if those credits were accumulated prior to 2014 and the HRA was not integrated with other employer group health coverage prior to 2014. The lack of such a rule in the notice raises questions on what treatment the IRS intends. Further guidance may clarify this point.

“Stand-alone” health FSAs: As previously mentioned, a health FSA that is offered in conjunction with another group health plan and meets the other requirements of an excepted benefit is not subject to the PPACA market reform rules. If an employer provides a health FSA that does not qualify as excepted benefits, the health FSA generally is subject to the PPACA market reform rules, which it will not meet by its terms because the health FSA will fail the preventive services requirement and potentially other PPACA market reform requirements. Thus, unless the health FSA reimburses only other excepted benefits (e.g., limited dental or vision), it will not be viable in 2014 and later years.

Employee payment plans: Beginning in 2014, the PPACA market reforms are violated if employers reimburse or pay directly premiums for health care coverage (other than excepted benefits) that the employee purchases from a party other than the employer (e.g., on the individual market, including the exchanges). The notice refers to Rev. Rul. 61-146, which is the long-standing authority under which an employer may reimburse or pay directly a health insurance premium of an employee on a tax-free basis. The notice does not withdraw Rev. Rul. 61-146. Thus, while it appears that an employee payment plan would continue to provide tax-free reimbursements to the employee, the notice makes clear that such a premium reimbursement arrangement, including an HRA, will not satisfy the PPACA market reform rules.

Consequently, an employer that chooses to reimburse the premiums for health insurance coverage through other than an employer plan, such as premiums for policies purchased through an exchange, would be subject to the Sec. 4980D excise tax in addition to any other nontax ramifications for maintaining a plan that does not comply with the market reform rules. Effectively, the notice precludes employee payment plans for health insurance in 2014 and later years.

Effect on EAPs: Notice 2013-54 states that the Departments intend to amend the regulations defining what constitutes excepted benefits to provide that benefits under an EAP are considered excepted benefits if the program “does not provide significant benefits in the nature of medical care or treatment.” This standard, which has been referred to in prior guidance, has raised questions of what might be viewed as “significant” and how it should be measured. The notice states that “a reasonable, good faith interpretation” may be used until final regulations are issued, and at least through 2014.

Coverage constituting minimum essential coverage: Employer-provided group health plan coverage generally is considered minimum essential coverage; however, employer-provided benefits that are considered excepted benefits are not minimum essential coverage.

Coverage under a retiree-only HRA, although not subject to the market reform rules, is employer-provided group health plan coverage that is minimum essential coverage. The notice clarifies that for any month in which a retiree has funds available for reimbursement through an HRA, the retiree is treated as having minimum essential coverage. Enrollment in minimum essential coverage would preclude the retiree from receiving a premium tax credit under Sec. 36B for purchasing coverage in an exchange (if the retiree is otherwise eligible for a premium tax credit). Amounts newly credited to an HRA for the current year may be counted for purposes of determining whether coverage is affordable or constitutes minimum value (which are the applicable standards for purposes of Sec. 36B), and the notice provides general rules for such calculations, which were previously set forth in proposed regulations on the determination of minimum value (78 Fed. Reg. 25909).

Other transition rules: The notice clarifies that employers may not offer qualified health plans through an exchange as an option in an employer cafeteria plan subject to Sec. 125. Plans that operate other than on a calendar year (as of Sept. 13, 2013) will not be treated as violating Sec. 125 if a health plan through an exchange is offered as a benefit in the cafeteria plan for the remainder of the plan year. However, this transition rule ceases to apply in the first plan year beginning after 2013. The notice also makes clear that the individual purchasing coverage in an exchange through a cafeteria plan may not receive a premium tax credit for any month in which the coverage is purchased through the cafeteria plan.


Employers will need to review the terms of their existing arrangements carefully to determine how the market reforms may apply in 2014. In particular, stand-alone HRAs for nonretirees in 2014 and later years will not be viable because of the application of the market reforms unless those HRAs are limited to excepted benefits. As referred to above, further clarification may be needed as to how existing balances in stand-alone HRAs are to be treated, since earlier FAQs suggested that broader relief would be provided than is explicitly stated in the notice.

Employee payment plans—in which employers reimburse for premiums of coverage purchased on the individual market—do not appear viable going forward. Although those arrangements would appear to continue to be tax free to the employee, they would cause the employer to be liable for the Sec. 4980D tax for failure to adhere to the market reforms.

Questions may arise as to how the guidance in Notice 2013-54 applies to arrangements in which employers offer employees a menu of health insurance products from which to choose but the employer limits its contribution to a fixed amount. These arrangements are sometimes referred to as “private exchanges.” While the guidance in Notice 2013-54 effectively precludes the use of a pretax arrangement to purchase coverage that the employer does not sponsor, the guidance does not change the long-standing rule that allows employers to fix their contributions to employer-sponsored coverage. A key technical point is that the employer must sponsor through a group health plan the various insurance products from which employees may choose (which themselves will be subject to the PPACA market reforms) rather than allowing employees to choose any coverage in the individual marketplace without the employer being a “sponsor” of that particular plan.


Michael Dell is a partner at Ernst & Young LLP in Washington, D.C.

For additional information about these items, contact Mr. Dell at 202-327-8788 or michael.dell@ey.com .

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

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