Health Reimbursement Arrangements and Health FSAs after the Affordable Care Act – A Story of Unintended Consequences

The Patient Protection and Affordable Care Act (also referred to as “Obamacare,” or the “ACA”) became law on March 23, 2010. While several provisions took effective immediately, many others have been (or will be) phased in. This article discusses several “market reforms” in the ACA that take effect January 1, 2014. The reforms impact Health Reimbursement Accounts (HRAs) and Health Flexible Spending Arrangements (Health FSAs). Based on what we now know about these reforms today, an employer may no longer offer HRAs or Cafeteria Plans (at least, the health portion thereof) without also offering a group health insurance plan after January 1, 2014.

Many employers use HRAs and Cafeteria Plans to help employees pay for uninsured medical expenses. An HRA is an arrangement funded solely by an employer to reimburse employees for medical expenses incurred by the employee, the employee’s spouse, and dependents. The reimbursement comes tax-free to the employee. Amounts that remain at the end of each year can often be used for expenses in later years. A Cafeteria Plan also allows employees to pay for medical expenses (as well as other expenses, such as dependent care). While employers can contribute to a Cafeteria Plan, these plans are often funded solely by employees through salary reductions. Effective January 1, 2013, the ACA limited salary reduction contribution amounts to $2,500/year.

The new market reforms under the ACA include the “annual dollar limit prohibition” and the “preventive services requirement.” To comply with the annual dollar limit prohibition, a group health plan may not establish any annual limit on the dollar amount of benefits for any individual. To comply with the preventive services requirement, group health plans must provide certain preventive services without imposing cost-sharing requirements. HRAs and Cafeteria Plans fall under the definition of group health plans under the ACA and must comply with the market reforms. Unfortunately, neither of these benefits will likely satisfy the market reforms when offered on a “stand-alone” basis. HRAs and Cafeteria Plans are offered on a “stand-alone” basis when not coupled (or offered in conjunction) with a group health insurance plan.

An employer that sponsors a separate group health insurance plan that satisfies both market reforms may continue to offer an HRA or Cafeteria Plan. In certain cases, HRAs may be offered if the employee is covered by another group health insurance plan (such as a plan sponsored by a spouse’s employer). However, if there is no group health insurance plan in the picture, the employer should not continue to offer “stand-alone” HRAs or the health portion of Cafeteria Plans after January 1, 2014. The employer may face penalties of up to $100/day, per affected employee, for each violation.

While there are several potential solutions the problem described above, they may not be viable in each situation. As a result, we suggest that employers without a group health insurance plan consider terminating the benefits under stand-alone HRAs or Cafeteria Plans.