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Health Care Reform FAQs Address Exchange Notices, HRAs, and Indemnity Plans

The agencies charged with implementing the Affordable Care Act have issued much of their guidance in the form of Frequently Asked Questions. The latest round of FAQs (#11) was issued on January 24, 2013. Among other things, these FAQs postpone the deadline for employers to notify their employees concerning the Affordable Health Exchanges, clarify which health reimbursement arrangements must comply with the ACA’s prohibition on annual or lifetime limitations on essential health benefits, and caution insurers as to the types of policies that will qualify for the “fixed indemnity” exception to many ACA requirements.

Exchange Notices

Although the state-wide Exchanges are not scheduled to begin enrolling individuals until October 1, 2013 (for coverage to take effect as of January 1, 2014), the ACA called for employers to notify their employees concerning the Exchanges by March 1, 2013. As long expected, the Department of Labor has now postponed that notification deadline. The DOL expects the new deadline to be sometime in the late summer or fall of 2013, thereby better coordinating with the Exchanges’ open enrollment period.

These notices – to be provided by employers of all sizes – must not only inform employees of the Exchanges’ existence, but also explain how employees may contact an Exchange to request assistance, advise them that they may be eligible for a premium tax credit to purchase coverage through an Exchange, and also explain the favorable tax treatment of remaining in the employer’s health plan. According to these FAQs, the DOL may issue a model notice that employers could use to satisfy these notification requirements.

Alternatively, the DOL is considering an approach under which employers could satisfy this notice requirement by providing employees with the information called for in the “employer coverage template” discussed in the Preamble to recent regulations concerning the Exchanges, Medicaid, and the Children’s Health Insurance Program. That template will be available for download at each Exchange website as a part of the streamlined process to apply for coverage through an Exchange, Medicaid, or CHIP. Given the ongoing communications that will be required among employees, employers, Exchanges, and the IRS, this alternative approach may prove to be preferable to any model notice.

“Integrated” vs. “Stand-Alone” HRAs

One of the key ACA provisions is a prohibition on imposing any annual or lifetime limitation on essential health benefits. It is virtually impossible for an HRA to satisfy this requirement, which is codified at Section 2711 of the Public Health Service Act.

In recognition of this fact, the Preamble to the final Section 2711 regulations drew a distinction between (1) HRAs that are “integrated” with other employer health coverage that itself complies with Section 2711, and (2) HRAs that are not so integrated. These “stand-alone” HRAs will generally violate Section 2711. (Note that retiree-only HRAs are exempt from this requirement, even if they stand alone.)

By adopting a fairly narrow definition of an “integrated” HRA, these FAQs essentially foreclose various arrangements that employers have adopted (or considered adopting) in response to the ACA. For instance, an employer-sponsored HRA may not be integrated with an individual insurance policy – even if that policy is part of an employer plan.

Moreover, an employer-sponsored HRA will be treated as integrated with other employer coverage only if the employee receiving the HRA contribution is actually enrolled in that other coverage. Thus, an employer crediting amounts to an employee’s HRA will violate Section 2711 if that employee is not enrolled in other coverage that otherwise complies with this requirement.

The FAQs do provide transition relief in this area. Although Section 2711 has been in effect since 2010, the agencies expect that future guidance will allow amounts credited to any HRA before January 1, 2014, to be used to reimburse medical expenses incurred even after December 31, 2013 – without violating Section 2711. This transition relief will apply to amounts credited before January 1, 2013, as well as to amounts credited during 2013 under the terms of an HRA as in effect on January 1, 2013. Employers sponsoring HRAs that fail to meet the agencies’ definition of “integrated” will therefore have the remainder of this calendar year to comply with this interpretation of Section 2711.

Fixed Indemnity Insurance

One category of “excepted benefits” under HIPAA includes certain hospital or fixed indemnity insurance policies. These fixed indemnity policies are also exempt from most of the ACA mandates. Because the agencies have noted “a significant increase in the number of health insurance policies labeled as fixed indemnity coverage,” these latest FAQs put insurers on notice that many policies fail to meet the applicable definition of this term.

The key deficiency noted in many policies is their failure to “pay a fixed dollar amount per day (or per other period) of hospitalization or illness (for example, $100/day) regardless of the amount of expenses incurred.” For instance, policies that pay different dollar amounts for specified surgical procedures, or that pay a fixed dollar amount per prescription, could pay widely differing amounts for the same period of time. They therefore cross the line between income-replacement benefits (exempt from the ACA) and health coverage (which must comply).

Although this fixed-indemnity guidance is primarily directed to insurers, employers that offer these types of policies to their employees may expect to see changes in those policies as insurers work to comply with these FAQs. Moreover, because this same “fixed indemnity” exception applies to a number of HIPAA provisions that predated the ACA, employers will want to ensure that their insurers actually modify their policies to fit within the exception.