21st Century Cures Act overrules IRS guidance on HRAs, enhances enforcement of Mental Health Parity Act

Reprinted with permission from Employee Benefit Review – February 2017

The 21st Century Cures Act (CCA), which passed with strong bipartisan support in the House of Representatives and the Senate in early December, was signed into law by President Obama on December 13, 2016. While the CCA includes important initiatives relating to heroin and prescription opioid addiction and cancer and biomedical research, it also reverses IRS guidance with respect to certain health reimbursement arrangements and takes important steps to enhance the enforcement of the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA).

Health reimbursement arrangement

     Prior guidance

In Notice 2013-54, the Internal Revenue Service issued guidance on the application of certain provisions of the Affordable Care Act (ACA) to health reimbursement arrangements (HRAs) and other arrangements under which an employer reimburses an employee for premium expenses incurred for an individual health insurance policy. The IRS held that such reimbursement arrangements were group health plans subject to the ACA requirements prohibiting annual limits on the dollar amount of benefits and requiring the provision of preventive services. Most, if not all, reimbursement arrangements did not comply with the ACA.

In 2014, the IRS issued Q&As which described the consequences if a reimbursement arrangement violated the requirements of the ACA. The IRS stated that reimbursement arrangements that imposed an annual dollar limit and/or did not provide preventive services would be subject to a $100 per day excise tax per each applicable employee, i.e., $36,500 per year per employee, under Section 4980D of the Internal Revenue Code.

The practical result of Notice 2013-54 and the Q&As was the demise of numerous arrangements under which employers reimbursed employees for premiums paid for health insurance that was not integrated with health coverage provided by the employer.

In Notice 2015-17, the IRS granted transition relief for employers that did not qualify as “applicable large employers” under the ACA. Under the Notice, during the specified transition period ACA penalties did not apply to HRAs maintained by small employers that provided reimbursement of insurance premiums. The transition period ended on June 30, 2015. The transition relief did not apply to applicable large employers or to HRAs that reimbursed medical expenses other than insurance premiums.

    Impact of CCA

The CCA reverses Notice 2013-54 by authorizing employers that don’t qualify as applicable large employers, i.e., employers with less than 50 full-time employees and full-time equivalents, to maintain certain reimbursement arrangements without incurring the $100 per day per employee penalty for failing to comply with the ACA.

The CCA provides that a “qualified small employer health reimbursement arrangement” (QSEHRA) does not constitute a group health plan for purposes of the requirements of the ACA.

A QSEHRA is defined as a reimbursement arrangement that:

• is provided by an eligible employer;
• is funded solely by such employer (and not by employee salary deferrals);
• is provided on the same terms to all eligible employees;
• provides for the payment of, or reimbursement of medical expenses incurred by the eligible employee or his or her family members; and
• includes a limit on the total amount of reimbursements for a calendar year that does not exceed $4,950 (or $10,000 in the case of a QSEHRA that also reimburses the medical expenses of family members of the eligible employee).

For purposes of these requirements an “eligible employer” is defined as employer that (i) is not an “applicable large employer” as defined under the ACA (i.e., less than 50 full-time employees and full-time equivalents), and (ii) does not offer a group health plan to any of its employees. An “eligible employee” is defined as any employee of an eligible employer. However, an employer may exclude the following employees from participation in the QSEHRA:

• employees who have not completed 90 days of service;
• employees who have not attained age 25; and
• part-time or seasonal employees.

A reimbursement arrangement will not fail to be a QSEHRA because an employee’s benefit varies in accordance with the variation in the price of an insurance policy in the applicable health insurance market based on (i) the age of the employee or his family members, or (ii) the number of family members which are covered under the arrangement. However, any such variation in price must be determined by reference to the same insurance policy with respect to all eligible employees.

If an individual is not covered by a QSEHRA for the entire year, the annual reimbursement limitation is prorated based on the number of months during the year that the individual is covered.

Beginning in 2017, the annual reimbursement limitation will be adjusted for inflation.

Benefits provided under a QSEHRA are excludable from gross income only if the eligible employee has minimum essential coverage as defined under the ACA. In addition, any credit otherwise allowable under the ACA is reduced by the amount of reimbursements under an QSEHRA.

Not later than 90 days before the beginning of the year, an employer must provide written notice to all eligible employees which includes the following information with respect to the QSEHRA:

• the maximum amount of expenses eligible for reimbursement under the QSEHRA during the year;
• a statement that the eligible employee should provide information regarding the maximum amount of reimbursement expenses to any ACA health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit; and
• a statement that if the employee is not covered under minimum essential coverage for any month, the employee may be subject to the ACA individual penalty for such month and that reimbursements under the QSEHRA may be includible in gross income.

In the case of an employer who is not eligible to participate in the QSEHRA, such notice must be provided before the date on which such employee becomes eligible to participate. A penalty of $50 per employee per incident of failure to provide a notice applies to an employer failing to satisfy the QSEHRA notice requirement, subject to a maximum penalty of $2,500 during any calendar year.

Enforcement of Mental Health Parity and Addiction Equity Act

    Compliance guidance

The CCA also modifies the terms of the MHPAEA to enhance enforcement efforts. The CCA directs the Departments of Health and Human Services, Labor, and Treasury to issue a compliance guidance document with the goal of improving compliance with the MHPAEA. Such compliance guidance document must include examples of previous findings of compliance and noncompliance, including examples illustrating requirements for information disclosure and nonquantitative treatment limitations, as well as descriptions of the violations uncovered during the course of MHPAEA investigations. With respect to examples relating to nonquantitative treatment limitations, the examples must include sufficient detail to explain a finding of compliance or noncompliance, including a description of the criteria for approving medical and surgical benefits as compared to the criteria for approving mental health and substance use disorder benefits. Finally, the compliance guidance document must include compliance recommendations

To assist in the development of the compliance guidance document, the CCA directs the Secretaries of Health and Human Services, Labor and the Treasury to enter into interagency agreements with each other and with the States for the purpose of sharing findings of compliance and noncompliance under the MHPAEA. The compliance guidance document must be updated every two years to update compliance information.

    Disclosure guidance

The CCA also directs the Secretary of Labor and the Secretary of the Treasury to issue guidance to group health plans and health insurance insurers to assist such plans and issuers in satisfying the disclosure requirements under the MHPAEA. The guidance must include clarifying information and examples of methods that plans and insurance issuers may use to provide information to participants, beneficiaries, contracting providers or authorized representatives as required under the MHPAEA. Such guidance must include comparative information with respect to:

• nonquantitative treatment limitations for both medical and surgical benefits and mental health and substance disorder benefits;
• the processes, strategies, evidentiary standards and other factors used to apply such limitations; and
• how the plans or policies ensure that such limitations are applied in parity with respect to medical and surgical benefits and mental health and substance use disorder benefits.

     MHPAEA Enforcement Action Plan

Within six months after the enactment of the CCA, the Secretary of Health and Human Services must convene a public meeting that includes the Departments of Health and Human Services, Treasury, Labor and Justice, as well as representatives from the States, to develop an action plan for MHPAEA compliance. The action plan must be finalized within six months of such meeting. The content of the action plan must include, among other things, objectives regarding how Federal and State agencies can cooperate to improve enforcement of the MHPAEA and recommendations to Congress regarding the need for additional legal authority to improve enforcement of the MHPAEA.

     Other directives

The CCA also requires an annual report on investigations under the MHPAEA with findings of any serious violations for the next five years, a GAO study on parity in mental health and substance use disorder benefits within three years after the enactment of the CCA, and development of information and awareness programs on eating disorders, as well as education and training of health professionals with respect to eating disorders.