IRS issues new ACA guidance on HRAs and FSAs


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September 20, 2013

Friends and Colleagues,

Earlier today, the IRS releasedNotice 2013-54. This document provides technical guidance about the effects of the ACA’s market reforms and other provisions on health reimbursement arrangements (HRAs), flexible spending arrangements (FSAs) and other types of employer plans (including employee assistance plans or EAPs). We understand that the IRS will formally publish Notice 2013-54 in the Internal Revenue Bulletin 2013-40 on September 30, 2013.

The guidance is brutally technical for a Friday afternoon, but a few highlights merit mention:

Employers may have challenges in “gaming” the new premium assistance tax credits. Some employers have sought ways to allow employees to apply for and enroll in the ACA’s new tax credits programs under (under IRC § 36B) while also having the employer providing an additional coverage subsidy for the employee. While there are a number of technical issues in this guidance for employers consider, the guidance appears to limit the ability of employers to provide pre-tax subsidies for coverage that an individual employee might purchase through the individual insurance exchange marketplaces with the new premium assitance tax credits. This is consistent with earlier IRS guidance and FAQs.

Employees need to be careful about enrolling in any HRA. For example, the guidance notes that employers that contribute to stand-alone health reimbursement arrangements (HRAs) for retirees (particularly pre-65 retirees) may actually disqualify such retirees from the premium assistance tax credits if the retirees enroll in the HRA. By way of contrast, the guidance appears to allow employers to contribute to HRAs for employees who enroll in other group plans (e.g., as an inducement for the employee to enroll in his/her spouse’s employee health plan) – and seems to clarify that such contributions will not count towards the affordability or minimum value calculations for the spouse’s employee health plan. Sound confusing? It is – and this may prove challenging to explain this to employees and retirees.

As a general observation, employers that drop employee health coverage are likely to look for tax efficient ways to to “gross up” employee compensation. Employers, though, would likely seek to do so without affecting the employee’s modified adjusted gross income (MAGI) or increase the amount of payroll taxes that the employer must pay. To the extent that the employer can achieve this objective, the employer would be able to increase the employee’s total compensation – but without increasing the employee’s household MAGI (which, if increased, would also reduce the value of the premium assistance tax credit for which the employee may qualify). Interestingly, the guidance released today may allow employers to use an “excepted benefits only” HRA strategy to accomplish this goal. Of course, employers could always use deferred compensation arrangements (e.g., 401(k) plans, etc.) as a complementary approach. Notwithstanding the guidance today, the benefits consulting industry is certain to generate some creative approaches to accomplish these and related employer goals.

Please feel free to contact me if you have any questions.

Regards,

Brian

Brian Haile Senior Vice President for Health Policy Jackson Hewitt Tax Service Inc.

Cell: (615) 761-6929

Email: brian.haile@jtax.com

Twitter: @haile_brian