Stand-alone HRAs Can Still Reimburse Health Insurance Premiums
Over the last 2 weeks, we have received several inquiries regarding PHS Act Section 2711 annual limit requirements and how it affects the future of stand-alone Health Reimbursement Arrangements (HRAs). This article outlines a special exemption from the 2711 rules for most stand-alone HRAs that reimburse health insurance premiums.
What Is an HRA?
Health Reimbursement Arrangements are employer-funded medical expense reimbursement plans that reimburse employees up to a set dollar amount for medical expenses (defined in Code section 213(d)) per year.
The IRS determines the rules and regulations for HRAs. Generally, HRAs must comply with Sections 105 and 106 of the Internal Revenue Code of 1986.
What Expenses Are Eligible For Reimbursement From an HRA?
HRAs can reimburse employees for medical care expenses as defined by IRS Section 213(d), which include amounts paid for:
(A) the diagnosis, cure, mitigation, treatment, or prevention of disease,
(B) transportation costs to receive medical care described in (A),
(C) qualified long-term care services as defined in section 7702B (c), or
(D) insurance.
What Is Section 2711?
Section 2711 of the PHS Act, as added by the Affordable Care Act, generally prohibits group health plans from imposing lifetime or annual limits on the dollar value of essential health benefits.
On June 28th, 2010, the federal government issued the following regulations for Section 2711:
"§ 2590.715-2711
No lifetime or annual limits.
(a) Prohibition—
(1) Lifetime limits. Except as provided in paragraph (b) of this section, a group health plan, or a health insurance issuer offering group health insurance coverage, may not establish any lifetime limit on the dollar amount of benefits for any individual.
(2) Annual limits— (i) General rule. Except as provided in paragraphs (a)(2)(ii), (b), and (d) of this section, a group health plan, or a health insurance issuer offering group health insurance coverage, may not establish any annual limit on the dollar amount of benefits for any individual.
(ii) Exception for health flexible spending arrangements. A health flexible spending arrangement (as defined in section 106(c)(2) of the Internal Revenue Code) is not subject to the requirement in paragraph (a)(2)(i) of this section.
..."
How Section 2711 Affects Stand-alone HRAs
The vast majority of stand-alone HRAs are not subject to the new health care law's prohibition on annual benefit limits.
Under a special exception (see bold text above), HRAs that meet the requirements for IRC Section 106(c)(2) are not subject to Section 2711's prohibition on annual limits. Here is the actual definition:
"Section 106(c)(2) Flexible spending arrangement - For purposes of this subsection, a flexible spending arrangement is a benefit program which provides employees with coverage under which—
(A) specified incurred expenses may be reimbursed (subject to reimbursement maximums and other reasonable conditions), and
(B) the maximum amount of reimbursement which is reasonably available to a participant for such coverage is less than 500 percent of the value of such coverage."
Under this exception, sometimes referred to as "the five times rule," the HRA will be treated as a section 106(c)(2) flexible spending arrangement, and the Section 2711 prohibition on annual benefit limits does not apply.
Also, if an HRA is a Section 106(c)(2) flexible spending arrangement, reimbursable medical care expenses may not include expenses for qualified long-term care services.
How To Ensure Your Stand-alone HRA Is Exempted From 2711
To ensure your stand-alone HRA is exempted from the Section 2711 rules, you can take the following steps:
- Set a cap on annual rollover so that the maximum amount of available reimbursement is always less than 5 times the annual value of the HRA, and
- Modify the HRA plan to exclude qualified long term care premiums as defined in IRC Section 7702B(c).
Why All The Confusion Regarding Stand-alone HRAs?
On January 24th, 2013, the Department of Labor released a new set of FAQs clarifying which HRAs will be considered "integrated" HRAs.
Several special interest groups (tied to the employer-based health insurance industry) have misinterpreted these FAQs to mean HRAs cannot reimburse premiums due to PHS Act Section 2711.
To be clear, PHS Act Section 2711 does not affect an HRA's ability (under Section 105) to reimburse health insurance premiums.
Note: This should not be taken as legal or tax advice.
