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Latest ACA Guidance Addresses HSAs, HRAs, and Wellness Programs

With 2014 fast approaching, the agencies charged with implementing the Exchange-related provisions of the Affordable Care Act (“ACA”) have stepped up the pace of their guidance.  On May 3, the IRS issued proposed regulations on the income tax credit available to help certain individuals purchase coverage through an Exchange.  Because any full-time employee who obtains such a credit may cause a “large employer” (one with 50 or more full-time employees) to owe a penalty under the ACA’s “play-or-pay” provisions, those employers should take note of this guidance.

Relevant Play-or-Pay Requirements

In general, an employee who is eligible for employer-sponsored health coverage will not qualify for this tax credit unless that employer coverage is either not “affordable” (because the employee’s share of the premium for employee-only coverage would exceed 9.5% of his or her income) or fails to provide at least “minimum value” (by covering the cost of at least 60% of “essential health benefits”).  This means that a large employer may avoid the play-or-pay penalties by demonstrating that its coverage satisfies both the affordability and the minimum value requirements.

In making these two demonstrations, employers may wonder whether certain types of payments that are related to a health plan may be considered.  These proposed IRS regulations address the treatment of the following three types of employer payments:

  • Contributions employers make to their employees’ health savings accounts (“HSAs”);

  • Amounts that employers credit to their employees’ accounts under health reimbursement arrangements (“HRAs”); and

  • Monetary rewards provided to employees who satisfy the requirements of a wellness program.

This recent IRS guidance is summarized in the following chart:

Treatment of HSAs, HRAs, and Wellness Programs Under “Affordability” and “Minimum Value” Standards



Minimum Value?

Current-Year Employer HSA Contribution

N/A (HSA may not be used to pay premiums)


HRA Credit1

Yes, if amounts may be used to pay premiums or medical expenses

Yes, but only if amounts may not be used to pay premiums

Wellness Program Incentive2 – Tobacco Usage

Yes, if reward = premium reduction (or avoidance of premium surcharge)

Yes, if reward = reduced cost-sharing

Wellness Program Incentive2 – Other

No3 (i.e., must assume employee will fail to satisfy program requirements)

No3 (i.e., must assume employee will fail to satisfy program requirements)

1 HRA must be integrated with eligible employer-sponsored health plan.

2 Wellness program must satisfy HIPAA nondiscrimination requirements.

3 Exception: For plan years beginning before January 1, 2015, incentives under any nondiscriminatory wellness program may be considered if a program was in effect on May 3, 2013, and an employee is in a category that was eligible to participate in the program on that date.

In addition to the information set forth in this chart (including its footnotes), employers should keep the following information in mind.

HSA Contributions

Because amounts held in an HSA may not be used to pay insurance premiums, HSAs do not enter into the affordability analysis.  However, any current-year employer HSA contributions may be used to show that the employer’s health plan satisfies the 60% minimum-value threshold.

HRA Credits

In analyzing current-year credits to an HRA, the key question is whether the HRA document allows those amounts to be used to pay premiums under the employer’s health plan.  If so, the employer may use those credits to help show that its plan is affordable (but may not use them in the minimum value analysis).  By contrast, if the HRA is limited to the reimbursement of medical expenses – and does not allow for the payment of premiums – the employer HRA credits may be applied toward the 60% minimum value threshold.

Wellness Programs Incentives

The proposed regulations divide wellness programs into two major categories – those that are designed to prevent or reduce tobacco usage, and all other programs.  For both affordability and minimum value purposes, an employer may assume that all employees either do not use tobacco or have successfully completed whatever alternative is made available to tobacco-users.  Thus, if the wellness program provides a premium discount to non-tobacco-users, the discounted premium amount may be considered when conducting the affordability analysis.  Similarly, any cost-sharing reduction granted to non-tobacco users (such as lower deductibles, co-payments, or co-insurance) may be considered when applying the minimum value standard.

Except as provided in the following paragraph, other wellness programs – those having nothing to do with tobacco usage – must be treated in exactly the opposite fashion.  That is, the employer must assume that employees will fail to receive the wellness program reward.  Thus, any premium discount must be disregarded when conducting the affordability analysis, as must any cost-sharing reductions when testing for minimum value.

There is an important exception to these wellness program rules for plans years beginning before January 1, 2015.  For this limited period of time, an employer may assume that all employees qualify for any reward made available under any HIPAA-compliant wellness program – including those having nothing to do with tobacco usage.  In essence, for the 2014 plan year, all wellness programs may be treated in the same way as tobacco-related programs for purposes of both the affordability and minimum value requirements.


In most cases, it will be obvious whether an employer health plan satisfies the minimum value requirement (at least to any insurer that underwrites the plan), so this recent IRS guidance may not be all that important for that purpose.  On the other hand, employers that wish to minimize their share of their employees’ health premiums – while still satisfying the affordability requirement – may want to take credit for their HSA contributions, HRA credits, or wellness program rewards.  Those employers should pay particular attention to that aspect of these regulations.