In a recent Chief Counsel Advice (CCA 201547006), the IRS has provided guidance for employers wishing to offer health reimbursement arrangements (“HRAs”) that both (1) provide reimbursements on a tax-free basis, and (2) satisfy the “market reform” requirements of the Affordable Care Act (“ACA”). In particular, this CCA focuses on HRAs (and similar “employer payment plans”) that reimburse employees for medical premiums paid for coverage under a health plan maintained by a spouse’s employer. The key to making these reimbursements on a tax-free basis is that the HRA may reimburse only those premiums that were paid on an after-tax basis.
As explained in our article of October 1, 2013, HRAs maintained on behalf of active employees may generally satisfy certain ACA requirements (including unlimited coverage for essential health benefits and preventive care) only through “integration” with a comprehensive employer health plan that itself satisfies those requirements. (Integration with an individual health insurance policy is not permissible.) Although this type of integration requires that an employee be eligible to participate in the employer’s health plan, the employee’s HRA may also be integrated with a comprehensive health plan sponsored by a different employer (typically, a spouse’s employer).
Integrating an HRA with a health plan sponsored by a spouse’s employer can pose some additional administrative burdens. Fortunately, the HRA sponsor may accept an employee’s representations as to his or her coverage under a plan of the spouse’s employer, as well as the nature of that coverage. However, most employers (and their employees) would like to be able to make these premium reimbursements on a tax-free basis. That’s where the guidance provided in this CCA should prove helpful.
The CCA describes seven different situations. Taken together, they illustrate the following three rules:
- An employee’s HRA may be used to reimburse the employee (on a tax-free basis) for premiums paid by the employee’s spouse – for either the employee only (as the spouse’s dependent) or the employee and the spouse – under a health plan maintained by the spouse’s employer.
- The tax-free nature of those reimbursements applies, however, only if the spouse paid those premiums on an after-tax basis. This is an important limitation, because most employees pay their health premiums on a pre-tax basis (through a Code Section 125 cafeteria plan). Indeed, some employers require that any premiums be paid this way.
- These same rules apply to any other type of “employer payment plan,” even if not designed to qualify as an HRA. This could be as simple as an employer’s agreement with an employee who waives coverage under the employer’s health plan to reimburse that employee for premiums paid by the employee’s spouse to cover the employee and/or spouse under a plan maintained by the spouse’s employer.
The final situation addressed in the CCA (Situation # 7) does suggest at least a partial solution to the restriction imposed by rule # 2. An integrated HRA might be designed to reimburse an employee for “medical expenses” described in Code Section 213(d) – other than medical premiums that were paid on a pre-tax basis – but with the amount of those reimbursements determined by reference to the premiums paid for coverage under a health plan maintained by a spouse’s employer (regardless of whether those premiums were paid on a pre-tax or after-tax basis). According to this CCA, such reimbursements may be made on a tax-free basis.
Such an approach would allow an employer to offer the same sort of HRA to all of its employees, even if some of those employees are able to pay their premiums for coverage under a spouse’s plan on a pre-tax basis. So long as an employee and his or her covered family members incur out-of-pocket medical expenses that are at least equal to the amount of those premiums (which should become more common as out-of-pocket limits go up), they may effectively be reimbursed for those premiums on a tax-free basis.
Employers that sponsor HRAs or other employer payment plans – or that might want to sponsor such an arrangement – should consider the guidance provided in this CCA when designing those plans. Members of Spencer Fane’s Employee Benefits Team will be pleased to assist in that effort.