The Impact of the Affordable Care Act on HRAs and FSAs and Why HSAs are Quickly Becoming the Option of Choice

The Patient Protection and Affordable Care Act had a significant impact on Flexible Spending Arrangement (FSA) contributions – employees can now only contribute $2,500 to a health FSA (although employers can contribute additional funds). Other FSAs such as those for commuter expenses and dependent care are unchanged.

The Department of Labor also recently issued new guidance on how the Affordable Care Act impacts Health Reimbursement Arrangements (HRAs). HRAs are generally a promise by an employer to pay for certain heath care expenses for employees or their dependents for the current benefit year up to a defined amount. Most HRAs allow the unused amounts to be rolled over to subsequent years, but unlike Heath Savings Accounts (HSAs), the employee loses access to the funds upon separation from the employer.

The three key points of guidance relate to the interaction of HRAs, and the Section 2711 of the Public Health Services Act (PHSA), which prohibits annual or lifetime benefit limits on group insurance. Under the new guidance, The Department of Labor states that an HRA must be “integrated” with a group health plan such that the combined benefit meets the requirements of the PHSA.  An HRA that is offered apart from group health insurance (a “standalone” HRA”) does not comply with the prohibition on benefit limits under the PHSA.

In 2014, employees will not be able to use a standalone HRA to purchase coverage on the individual market and have it qualify as being integrated with the individual health coverage to satisfy the requirements of PHS Act section 2711.

If an employer offers an employee coverage that does satisfy PHS Act section 2711 but the employee declines to enroll in that coverage, then an accompanying HRA provided to that employee will not be considered integrated with the coverage and therefore will fail to satisfy the requirements of PHS Act section 2711.

Last, the Department of Labor indicated that HRA amounts credited prior to 1/1/13 or during 2013 could be used after 12/31/2013 to cover medical expenses without causing the HRA to fail compliance with the PHS Act section 2711. However, if the HRA terms in effect on January 1, 2013, do not prescribe a set amount or amounts to be credited during 2013 or the timing for crediting such amounts, then the amounts credited may not exceed those credited for 2012 and may not be credited at a faster rate than the rate that applied during 2012.

If HRAs are an important part of your consumer-directed health care strategy then you’ll need to assess whether or not your HRA qualifies as being integrated with the health coverage of each employee as just one of the many decisions you will have to make as you enter the compliance maze under Health Care Reform.

In contrast, Health Savings Accounts are relatively unscathed by health care reform.  The threat that HSA-qualified health plans could not meet the actuarial value requirements of Obamacare have not materialized.  Accordingly, HSAs remain not only viable, but a very effective way of helping employers curtail the growth in the costs of their benefit plans. HSA-qualified health plans generally mean lower premiums, and employers can realize significant tax savings by implementing an HSA program.  Employers, that provide employees with the tools and education to encourage full participation in the consumer-directed healthcare experience, are realizing the benefits by increasing employee satisfaction while reducing health benefit costs.

15 thoughts on “The Impact of the Affordable Care Act on HRAs and FSAs and Why HSAs are Quickly Becoming the Option of Choice

  1. Your comment that HRA terminate when an employee leaves a company is not correct. It may but is an “option of the plan document” as provided by the HRA. Funds can stay with the employee until they or their dependents cease to exist and only then are the funds required to be returned to the employer who funded the HRA.

    • Hi Paul,

      Thanks very much for catching this. While HRAs in most cases are designed to terminate when an employee leaves a company, an employer may design the HRA to allow the terminated employee to spend down the funds after the employee is no longer with the company. It is important to note that, unlike an HSA, the HRA cannot be “cashed out” to the employee upon termination.

      Nicole

  2. Hi Jeff,
    Nice blog post. However, <> Is incorrect.

    Based on the existing regulations (see http://www.law.cornell.edu/cfr/text/29/2590.715-2711), the following HRA plans will avoid the annual limit requirements of Section 2711: “Integrated” HRAs, “Flexible Spending Arrangement” HRAs, “Excluded” HRAs, “Excepted” HRAs, and “Retiree” HRAs. This means that as long as a stand-alone HRA falls under FSA HRA (section 106(3)(3)) than it can be used as a stand-alone HRA. Simple plan design changes make it ACA compliant.

    Source: http://www.zanebenefits.com/blog/bid/262620/

    • Hi Christina,

      Thank you for reading our blog and providing your comments. Technically you are correct; however, our post was meant to give more general information about the impact of the ACA on HSAs versus HRAs. We recognize that HRAs can be designed in many ways to cover many different types of costs.

      The gist of the guidance is that if an HRA is created to allow employees to purchase insurance with tax favored funds, that type of HRA will fail 2711 compliance, unless the employees are also offered a compliant primary health plan in addition. This prevents employers from simply creating an HRA and directing the employees to a public or private exchange to get their own coverage.

      The other HRA “flavors” of which you speak are highly dependent on plan design for compliance. The devil is in the details, and can be a potential minefield for employers.

      HSAs are not subject to these new requirements, and can provide a much simpler solution for employers who want to bring consumerism and cost savings to their benefits strategy.

      Paul Verberne

  3. But I thought HSA’s could not be used with plans that have first dollar drug coverage and office visit copayments. ACA complaint plans contain these. How do you get around that?

    • Hi there, good question. The IRS recently released new rules that clarifies how HSAs are impacted by the Affordable Care Act. Notice 2013-57 says, “Accordingly, a health plan will not fail to qualify as an HDHP under section 223(c)(2) of the Code merely because it provides without a deductible the preventive care health services required under section 2713 of the PHS Act to be provided by a group health plan or a health insurance issuer offering group or individual health insurance coverage.” In short, ACA required certain preventative visits and prescriptions be provided at no cost to the employee, but the IRS states that this would not constitute first-dollar coverage when it comes to these specific services.

  4. Is there any option for my small business employer (church) to reimburse me for my Medicare and Advantage payments? They pay all other employees insurance and want to continue to pay mine (saving them $600 a month.) We thought HRA’s were the answer but find out now they are not.

    • Hi Debbie,

      Unfortunately, I cannot speak to this as it falls outside the scope of HSAs. If your employer has a broker or an account executive for their insurance it would probably be best to consult that person on possible solutions.

      Regards,
      Owen

  5. I have an individual medical plan that provides “minimum value” as deemed by the ACA. Additionally I have an HRA/MRP with a union contributed by an employer who does not provide health insurance. I have been told that the new law states that to still utilize the HRA/MRP I must have coverage by an other “group” plan and that individual plans are no longer an option. Furthermore, it is stated that if I can no longer participate in the HRA/MRP due to having an individual plan I will be automatically enrolled in the union “group” medical plan. I cannot find supportive text upholding that an individual plan can no longer be acceptable for a union HRA/MRP.

    • Hi Teresa,

      I apologize for the slow reply on this. I think this question is outside our scope since it has to do with insurance eligibility rather than HSA, FSAs or HRAs. I have escalated this to our compliance team but we may end up declining to answer since it’s outside our scope. I would suggest reaching out to the insurance rep that is managing the plan.

      Regards,
      Owen

    • Hi Teresa,

      I’m in the exact same situation with my union and am still waiting for an answer from them. Any updates pertaining to your situation?

  6. I began working for an employer in 2004, contributions were made by my employer each month into an HRA until I left employment in 2010. The HRA continued and I was able to use it for medical expenses. I was informed by my employer in January 2013 that any money (approx $7000) that was left in my HRA was forfeited by me if I did not use it by 12/31/2013….is this true? I am interpreting the statement above “Department of Labor indicated that HRA amounts credited prior to 1/1/13 or during 2013 could be used after 12/31/2013 to cover medical expenses without causing the HRA to fail compliance with the PHS Act section 2711″ to state that my employer contributions were made prior to 1/1/2013 and therefore should remain in my HRA for use until exhausted. Is this true?

    Thank you,
    Jessica

    • Hi Jessica,

      Generally speaking the HRA is what’s called a notional account. That means that the employer doesn’t really give you money, they just promise to pay certain expenses for a certain period of time up to a certain dollar amount. Employers can change the design of their plans but have to notify the plan members of those changes. It looks like that is what they did in this case. The Department of Labor language allows companies to roll over HRA amounts without failing compliance but does not mandate that they do so, which means it’s at the company’s discretion.

      I hope that answers your question but let us know if not.

      Paige

  7. I manage the employee benefits for our small business. We currently have a HDHP and i have been funding the employees HRA to the level of a single deductible. As cost rise i want to allow my employees to also have an HSA so that they can build funds for the future and would like them to co-exist. I understand that i have to put limits on my HRA in order to have both the HSA & HRA. If our HDHP has deductibles of $1250 single/2500 family, can i fund the HRA at $1000 & limit to dental, vision, preventative care and also put a deductible on the HRA of $1000, this way the employee pays the first $250 of the single and an employee with a family plan would have to pay the first $1500 of the deductible, is this allowed? I have been researching this and it is somewhat confusing what is considered a limited HRA? Some sources say the HRA cannot kick in until the full HDHP is paid by the employee even if they are on a family plan, others are more vague and just say you have to place a deductible on the HRA…

    • Hi Cathy,

      Typically you cannot have both an HRA and an HSA at the same time per IRS guidelines, but there are a few exceptions to that rule. Here are the only types of HRA’s that you can have with an HSA:

      “Limited-purpose health FSA or HRA. These arrangements can pay or reimburse the items listed earlier under Other health coverage except long-term care. Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible.

      Suspended HRA. Before the beginning of an HRA coverage period, you can elect to suspend the HRA. The HRA does not pay or reimburse, at any time, the medical expenses incurred during the suspension period except preventive care and items listed under Other health coverage. When the suspension period ends, you are no longer eligible to make contributions to an HSA.

      Post-deductible health FSA or HRA. These arrangements do not pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met. The deductible for these arrangements does not have to be the same as the deductible for the HDHP, but benefits may not be provided before the minimum annual deductible amount is met.

      Retirement HRA. This arrangement pays or reimburses only those medical expenses incurred after retirement. After retirement you are no longer eligible to make contributions to an HSA.”

      I took this straight from the IRS Publication 969 and you can read the whole publication here: http://www.irs.gov/publications/p969/ar02.html#en_US_2013_publink1000204025

      I hope that answers your question, but please let me know if not.

      Paige