We are considering offering a health reimbursement arrangement (HRA) for our employees’ working spouses who opt out of our health insurance coverage and enroll in coverage through their own employers. What compliance issues should we be contemplating before offering a spousal incentive HRA (SIHRA)?
An employer must consider several compliance issues before offering a SIHRA, discussed below.
As background, various benefits administrators are offering employer plan sponsors the ability to set up and administer a SIHRA as an option for their employees. This is an HRA that is available, during the employer’s open enrollment period, for working spouses of employees on a side-by-side basis with the other health plan options. As a reminder, an HRA is a tax-advantaged plan that allows employers to reimburse their employees (or the employees’ spouses or dependents) for qualified health expenses.
If a SIHRA is elected, then the employee waives group health plan coverage for his or her spouse, and the spouse is given access to an HRA that can be used to pay for copays, deductibles, coinsurance or other non-reimbursed medical expenses. The specific terms of the available reimbursements would be determined by the employer and set forth in the SIHRA plan document/summary plan description (SPD). The employee’s spouse would enroll in coverage elsewhere (via the spouse’s employer’s health plan) and would need to attest that he or she is enrolled in coverage that meets the Affordable Care Act (ACA) requirements and does not consist solely of excepted benefits.
Is this type of arrangement permissible under the ACA?
Yes, but the SIHRA will need to be “integrated” with group health plan coverage that is ACA-compliant. This can include a spouse’s employer-sponsored plan (see ACA FAQs Part 37). The employee’s working spouse would be required to attest that he or she was actually enrolled in his or her employer’s ACA-compliant health plan and that the plan did not provide only excepted benefits. This requires the employer to be able to administer the attestation process (or hire a third party to administer). If the SIHRA is not integrated, then it is likely to violate some of the ACA rules, such as the prohibition on lifetime and annual dollar limits on essential health benefits and covering ACA-mandated preventive care without cost sharing. Requiring proof of the availability and enrollment in ACA-compliant health coverage can create an additional administrative burden.
What are the related HRA rules?
An HRA is funded solely by an employer and reimburses an employee for medical care expenses incurred by the employee and the employee’s spouse, dependents and eligible children, up to a maximum dollar amount for a coverage period. HRAs, including SIHRAs, are typically group health plans. As such, they are subject to the laws that apply to group health plans (i.e., ERISA, ACA), including annual reporting, COBRA, the Health Insurance Portability and Accountability Act (HIPAA), Patient-Centered Outcomes Research Institute fees and Medicare Part D creditable coverage disclosures.
Some of the most critical compliance considerations include the following:
How would a SIHRA impact HSA eligibility?
When an employee (or spouse) is covered by a general purpose HRA (an HRA reimbursing medical expenses, including cost sharing and out-of-pocket expenses on a first-dollar basis), the employee is not eligible to contribute to an HSA (regardless of whether the spouse’s primary medical coverage through his or her employer is an HSA-qualified high-deductible health plan). An employer offering a SIHRA will want to make sure this is communicated clearly to the employee during enrollment, since determining HSA eligibility is generally the employee’s responsibility, and not informing the employee may result in negative tax consequences (i.e., excess contributions resulting in additional gross income and potential excise tax) as well as employee relations issues.
What are the enrollment considerations?
A SIHRA would only be offered to working spouses with coverage through their own employer. Many covered spouses may not have access to coverage elsewhere, especially those with ongoing high-cost claims. Often these spouses may not be working due to their health condition. This could impact any potential cost savings via a SIHRA.
If the employee’s employer and the spouse’s employer both have open enrollment at the same time, there may be no issue with a working spouse enrolling in both a SIHRA and his or her employer’s group health plan. If not, then the employer will need to be able to coordinate with the spouse to confirm that the spouse is enrolled in group health coverage that meets the ACA requirements at the time the employee’s coverage is waived. The timing will be key, as there would most likely need to be a qualifying life event under the cafeteria plan rules to change coverage once elected.
Furthermore, if the working spouse loses coverage under his or her employer’s group health plan, then he or she would have a special enrollment right and may enroll in the group health plan offered to the employee by his or her employer. In this case, the plan document would need to make it clear what happens to a SIHRA (e.g., forfeiture, freeze).
What are the tax considerations?
In general, qualified health expenses may be reimbursed on a tax-favored basis under a SIHRA. This would include medical expenses that are not reimbursed elsewhere as well as deductibles, copays and coinsurances under the working spouse’s employer’s group health plan.
However, a SIHRA may not reimburse premiums for the working spouse’s employer coverage if the spouse pays the premiums on a pre-tax basis through the spouse’s employer's cafeteria plan. Since this is typically how health plan premiums are paid for employer-sponsored coverage, reimbursing these premium expenses would result in “double dipping” for tax purposes. This practice is impermissible under IRS guidance; therefore, reimbursements via a SIHRA may have to be limited to other expenses (copays, deductibles) only, or the premiums for the working spouse’s employer plan would have to be paid by the spouse with after-tax dollars, which would likely not be an option under most group health plans.
