IRS Notice 2015-87: Impact of ACA on Consumer-Directed Plans

IRS Notice 2015-87 provides guidance on the impact of the Affordable Care Act (ACA) on consumer-directed health plans, effective for plan years beginning on or after 1 January 2017.

Health Reimbursement Arrangements

The IRS has concluded that an HRA that is integrated with employee-only coverage cannot be used to reimburse expenses of an employee’s spouse or dependents.  The HRA satisfies the ACA’s group market reforms only if it is limited to individuals who are enrolled in both the HRA and the employer’s ACA-compliant health plan.  ASR will amend all client plans to comply with this change, effective January 1, 2017.

Flexible Spending Accounts (FSAs)

The IRS clarified how flex credits and opt-out payments affect affordability:

• Employer contributions that do count toward the employee required contribution, reducing the dollar amount of the required contribution: Employer flex credits to a cafeteria plan that may be used to pay for health coverage or be contributed to a health FSA, but may not be used for other types of benefits (such as life insurance or dependent care) and may not be taken as taxable cash. For example, if the employee contribution for self-only coverage is $200 per month, and the employer flex credit is $600 per year (ratable for each month at $50), the employee’s required contribution is $150 ($200 – $50).
• Employer contributions that do not count toward the employee required contribution, and do not reduce the dollar amount of the required contribution: Employer flex credits to a cafeteria plan that may be used either for health coverage or for other types of benefits (such as life insurance or dependent care) or may be cashed out. For example, if the employee contribution for self-only coverage is $200 per month, and the employer flex credit is $600 per year (ratable for each month at $50), the employee’s required contribution is still $200 per month.
• Employer contributions that increase the employee required contribution: Employer opt-out (cash-in-lieu) payments that may not be used to pay for health coverage but are offered to an employee only if s/he declines or waives employer coverage. Such payments have the effect of increasing an employee’s required contribution for coverage because the employee who elects coverage under the health plan must forgo $100 per month in compensation in addition to paying $200 per month for coverage.  For example, if the employee contribution for self-only coverage is $200 per month, and the employer offers $100 per month in additional taxable wages to each employee who declines coverage, the employee’s required contribution for self-only coverage will be $300 ($200 + $100).

Two Notable Exceptions:

• Transition relief for plan years 2015 and 2016 applies to opt-out arrangements adopted no later than December 16, 2015. All flex credits will count toward reducing the employee’s required contribution, even if they may be used for non-health benefits or taken as cash.  Opt-out payments will not be counted as increasing the employee required contribution.
• Opt-out payments that are unconditional (i.e., provide additional compensation for waiving regardless if the employee has other coverage) must be considered in measuring for affordability, so the opt-out amount in these situations must be included in the reported cost on line 15 of Form 1095-C (starting in 2017). If a conditional opt out is an “eligible opt-out arrangement,” then the additional compensation can be disregarded in measuring for affordability and need not be reported on Form 1095-C.  An eligible opt-out arrangement is where the employee provides reasonable evidence that the employee and his/her spouse and dependents have alternative minimum essential coverage (other than individual coverage either in the private market or through the exchange) during the period of coverage for which the opt-out applies.  “Reasonable evidence” includes an employee’s attestation or certification that the requirements are satisfied, but the employer can also require the employee to provide proof.  The amount of the opt-out bonus can be excluded from the affordability calculation as long as reasonable evidence is provided for the entire plan year, even if the alternative coverage terminates at some point during the year.

If you have questions about IRS Notice 2015-87, call ASR Health Benefits at (616) 957-1751 or (800) 968-2449.