Internal Revenue Service (IRS) Notice 2013-54 provides guidance on the application of certain provisions of the Affordable Care Act (ACA) for health reimbursement accounts (HRAs), including HRAs integrated with a group health plan. The notice also confirms prior guidance clarifying that an employee cannot use funds from a stand-alone HRA to purchase individual health insurance on a tax-favored basis.
An HRA is considered integrated with a group health plan if, under the terms of the HRA, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA at least annually and, upon termination of employment, either the remaining amounts in the HRA are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA.
The table below provides additional details regarding an HRA integrated with a Minimum Value plan versus a Non-Minimum Value plan:
HRA Integrated with a Minimum Value Plan
HRA Integrated with a Non-Minimum Value Plan
The customer offers a group plan that provides minimum value.
The customer offers a group plan, regardless of whether it provides minimum value.
The employee receiving the HRA actually enrolls in the group health plan that provides minimum value.
The employee receiving the HRA actually enrolls in the group health plan.
The HRA is only available to employees enrolled in a group health plan that provides minimum value.
The HRA is only available to employees enrolled in a group health plan.
The employer has the option for the HRA reimbursements to include 213(d) expenses (a more robust reimbursement option than if the plan did not meet minimum value).
HRA reimbursements are limited to copayments, coinsurance, deductibles, non-HRA group health plan premiums and non-Essential Health Benefits.
The employee is able to permanently opt out from receiving reimbursements from any rollover account balances under the HRA at least annually, and upon termination of employment, any remaining HRA balance is automatically forfeited or the employee is permitted to permanently opt out from receiving any reimbursements.
The benefits provided by the HRA generally will constitute minimum essential coverage; therefore, the HRA opt out is a requirement. If an employee is enrolled in an HRA, they would not be eligible to qualify for a subsidy if purchasing coverage on the Exchange. If an employee opts out of the HRA, if permissible, they could be eligible for a subsidy.
These new requirements are meant to discourage customers from adopting a lean plan and then supplementing it with HRA dollars.
For this reason, UnitedHealthcare will not allow clients to set-up an HRA with a UnitedHealthcare Preventive plan.
The opt-out requirement is fulfilled through an annual Open Enrollment by allowing a member to opt out of both medical and the HRA.
UnitedHealthcare will provide standard Summary Plan Description (SPD) amendment language to support the HRA opt-out requirement.
Please note that processes may differ by entity; additional details will be forthcoming.
Other important considerations on the application of the market reforms provisions to HRAs and retirement reimbursement arrangements (RRAs) include:
RRAs are still permitted as stand-alone and do not have to be integrated with a medical plan. RRAs are considered Minimum Essential Coverage and will have an impact on whether an employee would be eligible to qualify for a subsidy if purchasing coverage on the Exchange.
Considerations for a retiree
A retiree cannot have both the RRA plan and tax credit under the Exchange.
A retiree can opt-out of retiree coverage at the beginning of the plan or on a monthly basis as determined by the customer.
If the retiree opts out of the RRA plan, the opt-out will be permanent. However, the customer can allow for opting back into the RRA plan.
The customer is the eligibility manager and must include plan rules within the plan document. All retiree questions on opting in and out of the RRA will be directed to the customer.
The customer must remove retirees who opt out from their enrollment and contribution files.
Video: FSA, HSA, HRA Changes
Learn about changes to these health spending accounts, particularly over-the-counter medications, under the Patient Protection and Affordable Care Act. View video
How will this affect my debit card transactions for HSAs?
As of 6/11/10: It is the account holder's responsibility to only use the HSA debit card for eligible medical expenses as defined by the IRS or to pay the applicable penalties if ineligible expenses are reimbursed. Starting January 1, 2011, eligible expenses will no longer include OTC medicine unless prescribed. HSA account holders will still be able to use an HSA to pay for insulin. If an HSA account holder has a prescription for an OTC medicine and they use an HSA to pay for such medicine, they will need to keep the prescription and receipt for the purchase along with their tax records. Consult the HSA tax center at Optum Bank or the IRS web site for more information.
If my health FSA or HRA issues a debit card that I use to pay for over-the-counter medicines or drugs, will I still be able to use the card to purchase over-the-counter medicines or drugs after Dec. 31, 2010?
Generally, yes, if you have a prescription for the medicine or drug. Starting after Jan. 15, 2011, you may continue to use an FSA or HRA debit card to purchase over-the-counter medicines or drugs at these vendors, so long as you obtain a prescription for the medicine or drug, the prescription is presented to the pharmacist, and the medication is dispensed by the pharmacist and given an Rx number.
Participants will also still be able to be reimbursed from their health care FSA, HRA, RRA or FHRA/VEBA for a prescription OTC medicine purchase; they will need to pay for the expenses out-of-pocket and submit a copy of their prescription and receipt for the purchase.
For further information, including guidance on purchases of over-the-counter medicines and drugs from health care providers other than pharmacies and mail order and web-based vendors (such as physicians or hospitals), see IRS Notice 2011-5. For guidance on debit card purchases at "90 percent pharmacies," see IRS Notice 2010-59.
As of January 15, 2011, what is the process for using an FSA or HRA debit card to purchase OTC drugs?
The new guidance modifies Notice 2010-59 and permits the use of FSA and HRA debit cards for OTC drug purchases provided:
prior to purchase, a prescription is presented to the pharmacist;
the OTC medication is dispensed according to state prescribing laws and an Rx number is assigned;
records of the sale are maintained by the pharmacist (i.e. Rx number, name of purchased, date and amount of the purchase) and made available upon request; and
the debit card system will not accept a charge for an OTC medication unless an Rx number has been assigned.
Provided the above requirements are met, effective January 15, 2011, the debit card transaction will be considered fully substantiated at the time and point-of-sale.
What about plans that don't run along the calendar year (January to December) but, for example, from June to May?
The new restriction on non-prescription OTC medicine or drug purchases takes effect January 1, 2011. In other words, the OTC restriction is effective for expenses incurred on or after January 1, 2011, regardless of whether an employer's plan is a non-calendar year plan. Employers should modify their plan documents to comply with the law and notify employees as required.
Which tax-advantaged health accounts does the OTC change affect?
The OTC change affects all types of tax-advantaged health accounts, including HSAs, health care FSAs, HRAs, RRAs and FHRA/VEBAs. Starting January 1, 2011, account holders may not use the accounts for OTC medicines unless they have a prescription. Account holders will still be able to use a tax-advantaged health account to pay for insulin.
Are other medical supplies like contact lens solution, bandages, blood-sugar test kits and durable medical equipment (such as wheel chairs or hospital beds) affected by the limit on OTC medicines?
The new reimbursement restrictions apply only to medicines and drugs and not to other items that qualify as medical expenses under section 213(d)(1) of the Code, including equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits. Items may qualify as medical care if they otherwise meet the definition of medical care in § 213(d)(1), which includes expenses for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. However, expenses for items that are merely beneficial to the general health of an individual, such as an expenditure for a vacation, are not expenses for medical care.
A client stated that the current list of OTC medicines will be reduced but some products may still be allowed. Do you have any details on that?
The IRS has recently issued Notice 2010-59 which allows for OTC items that are not medicines or drugs, but otherwise meet the definition of medical care (e.g. crutches, bandages or blood sugar testing kits).
If a plan participant obtains a prescription for an OTC medicine, do they need to present it to the pharmacist in order to submit a claim and be reimbursed?
If the plan participant wishes to use their FSA or HRA debit card to purchase the OTC medicine, then the prescription for that OTC medicine must be presented to the pharmacist for entry of the Rx number into the data record while making the purchase. The plan participant may also choose to purchase the OTC medicine out-of-pocket. In order to be reimbursed for a prescription OTC medicine out-of-pocket purchase, a copy of the prescription and receipt for the purchase must be submitted to the FSA or HRA.
If the plan participant purchases an OTC medicine with an HSA, they will need to keep a copy of the receipt and the prescription to verify that withdrawals were made to pay for eligible medical expenses.
Will an employer need to update their summary plan description (SPDs) to reflect the changes to OTC restrictions, the FSA contribution limit and the new definition of dependent children?
The law change will require employers to update plan documents for 2011 to comply with the restrictions on OTC medicine or drug purchases (if those were eligible expenses under the plan) and the changes to the definition of dependent children (if employers want to allow employees to include them in their cafeteria-plan elections). Looking ahead, plan documents may also require updating to comply with the restrictions on employee contributions to health care FSAs effective on Jan. 1, 2013.
If a plan participant incurs an eligible OTC medicine expense during the 2010 plan year, can they still submit it for health care FSA, HRA, RRA or FHRA/VEBA reimbursement during the run-out period?
As of 6/11/10: Yes, provided the expense is incurred on or before December 31, 2010 and provided that the OTC medicine expense is an eligible expense under your employer's plan.
If a customer's plan has a grace period attached to the 2010 plan year, can the participant continue to incur eligible OTC medicine or drug expenses through the grace period?
No. As of January 1, 2011, consumers may not pay for OTC medicines or drugs from tax-advantaged health accounts unless prescribed.