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A Better Partnership


May 2013
May 09, 2013

New Health Care Reform Guidance:
How Will HSAs, HRAs and Wellness Programs Impact Affordability?

As employers begin to plan for the “affordability” requirement that kicks in for 2014, one vexing issue has been how the affordability calculation takes into account wellness program incentives and employer contributions to health savings accounts (HSAs) and health reimbursement arrangements (HRAs). New guidance sheds light on these issues.

The Affordability Requirement

Beginning in 2014, employers that want to avoid Health Care Reform’s play-or-pay penalties must offer their employees health plan coverage that is “affordable.” To be deemed affordable, the coverage must meet two tests:
  • The employee’s contribution to the cost of self-only coverage cannot exceed 9.5% of his or her household income.
  • The coverage must provide minimum value, meaning it must, on an actuarial basis cover at least 60% of the costs using a benchmark developed by the Department of Health & Human Services.
Large employers (those with more than 50 full-time equivalent employees) who fail to provide affordable coverage may have to pay a non-deductible tax of up to $3,000 each year for each employee who qualifies for subsidized coverage under the exchange. Employees will not qualify for subsidized coverage, and therefore cannot trigger a penalty, so long as the coverage meets both of the affordability requirements.

Wellness Program Incentives

Wellness program incentives often come in one of two forms:
  • Incentives that reduce cost-sharing
  • Incentives that reduce premiums
When determining the "affordability" of premium contributions before the start of the 2014 plan year, employers need to know whether they can use rates and cost-sharing numbers that assume individuals have earned the incentive.

Under the proposed regulations—which won’t go into effect until 2015—the answer depends on whether the incentive is designed to prevent or reduce tobacco use.  For a program that rewards non-smokers (and individuals who meet a reasonable alternative), premium discounts may be included when determining whether coverage meets the 9.5% test and cost-sharing reductions can be factored in when evaluating minimum value. But if the wellness program does not involve tobacco use, any discounts to premium or other cost-sharing provisions must be disregarded when determining if the coverage meets the 9.5% and minimum value requirements.

However, under an IRS transition rule, an employer can take into account all cost-sharing and premium incentives (even if unrelated to smoking) when running the 9.5% and minimum value affordability tests. The transitional rule is only applicable for plan years that begin before January 1, 2015. To qualify, the wellness program and incentives must have been in effect as of May 3, 2013.

HSA Contributions

If an employer contributes funds to an employee’s HSA, the employer may take this contribution into account when determining whether the coverage meets the minimum value test. Employee contributions, however, are ignored. (Note also that employer contributions cannot factor into the 9.5% test because HSA funds cannot be used to pay health insurance premiums.)

HRA Credits

The rules regarding employer HRA credits depend on the design of the HRA. For HRAs that may be used to help fund a health plan’s premium, the amount that the employer credits to the HRA for the year may be used to evaluate whether the employee’s health plan premiums meet the 9.5% test—but may not be used for determining minimum value.

The rules are the exact opposite if the HRA only permits reimbursement of medical expenses but does not permit payment of premiums. In that case, the employer’s HRA credits for the year may be used to determine if the plan provides minimum value, but may not be taken into account for meeting the 9.5% test.

Also keep in mind that beginning in 2014, HRAs must be integrated with medical coverage.  Because of the prohibition on annual limits, stand-alone HRAs will no longer be viable. For the HRA to be considered integrated, an employee can only receive HRA contributions if he or she also enrolls in your plan’s medical coverage.

Comments or Questions

The IRS is accepting comments on these rules until July 2, 2013. If you disagree with the approach taken in these proposed rules, you should submit a comment at the Federal eRulemaking Portal at (IRS REG-125398-12). If you have questions about the new requirements, please contact April A. Goff ( or 616.752.2154), Norbert F. Kugele ( or 616.752.2186), or any other member of Warner’s Health Care Reform Task Force.

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