Good News (Sort of) Regarding HRAs in San Francisco

Posted by Ed Fensholt on January 8, 2014 | Be the First to Comment

San Francisco authorities have partially reinvigorated—albeit at the eleventh hour—the use of health reimbursement accounts (HRAs) as a way to satisfy the San Francisco Health Care Security Ordinance (HCSO) for 2014 and beyond.  

For the first time, the City will permit employers to use HRAs offering only “excepted benefits” (for example, dental, vision, long-term care, fixed indemnity and critical illness coverage) as a vehicle for meeting the employers’ HCSO obligations. This is good news for employers who have used HRAs to satisfy the HCSO in the past, but were concerned about their ability to do so in the future.  

However, this pleasant surprise is tempered by rather significant complexity, particularly with respect to employees averaging more than 20 hours per week in the city or county of San Francisco (collectively, “San Francisco”). 

Let me explain.  

Dealing with the HCSO, Pre-ACA 

Many employers doing business in San Francisco have to deal with the HCSO, which requires covered employers to make “healthcare expenditures” on behalf of employees averaging as few as eight hours per week there, well below the 30-hours-per-week threshold under the Affordable Care Act (ACA), the federal health reform law.  

HCSO-required expenditures are determined quarterly for each HCSO-covered employee. The calculation considers both the employer’s size and the number of hours the employee worked in San Francisco for the relevant calendar quarter.  

Prior to 2014 many employers, particularly those with hourly employees whose hours fluctuated from pay period to pay period, met their obligation under the HCSO by crediting their required expenditure amounts to stand-alone HRAs for the benefit of covered employees.

The beauty of this approach (at least for the employer) was that HRA amounts were mere bookkeeping entries and the employer never actually contributed to the HRA until a claim was paid. More often than not, the employee made few if any claims against the HRA and then forfeited the HRA benefit shortly after terminating employment. The employer therefore never truly paid benefits equal to its required healthcare expenditures.  

Per Usual, ACA Complicates Matters 

The ACA created problems for this approach. Under the ACA, stand-alone HRAs, like those used by San Francisco employers, are effectively dead after 2013, at least for active employees. The cause of death is the ACA’s prohibition of annual dollar limits on essential health benefits. HRAs, by their nature as account-based plans, cannot comply with the prohibition. HRAs for active employees survive after 2013, if at all, only if they are considered “integrated” with group health plan coverage. 

Under the ACA, there is another route to exemption for an HRA: supplying only “excepted benefits,” such as typical dental or vision coverage, because excepted benefits are not subject to the prohibition on dollar limits. In previous guidance, however, San Francisco authorities said that an HRA can’t be used satisfy an HCSO obligation unless the HRA reimburses a much broader group of healthcare expenses.   

This conflict between what the ACA allows, and what the HCSO required under its previous guidance, forced employers to consider other, more expensive options for meeting their HCSO obligations for 2014 and beyond. But now all that has changed, albeit with some restrictions and complexity. 

The New Ruling…and its Conditions 

San Francisco will permit employers to use an HRA to meet their HCSO expenditure obligation for periods after 2013, even if the HRA provides coverage only for “excepted benefits.” San Francisco authorities say the term “excepted benefits” has the same meaning it has under federal law. Thus, the term includes most limited scope dental and vision coverage, accident and disability coverage, critical illness coverage, hospital or other fixed indemnity coverage, and coverage for long-term or nursing home care, home health and community-based care, as well as a hodgepodge of other ancillary coverage. 

At first blush this looks like great news: employers may use HRAs offering, for example, only dental and vision coverage to satisfy their HCSO obligations. And when the employee terminates employment with a positive HRA balance, the employer may terminate the coverage (subject to COBRA, for larger employers) and never truly spend an amount equal to its HCSO obligation.  

Oh, if only it was that easy.  

Unless the employer allows the employee to use the HRA to reimburse all of the excepted benefits listed below, the employer must (at year end) request HCSO credit for its HRA contributions and provide “supporting documentation” that its contributions “were reasonably calculated to benefit the employee.” These excepted benefits are: 

  • Dental benefits limited to treatment of the mouth.
  • Vision benefits limited to treatment of the eye.
  • Medical indemnity insurance (i.e., fixed indemnity).
  • Long-term, nursing home, home health, or community-based care.
  • Coverage limited to a specific disease or illness (e.g., a cancer policy).

 As a result, most employers will want to amend their HRAs to provide reimbursement of expenses for any and all services or coverage in this bulleted list. Easy enough. But there’s more.

Where the employer credits, to an employee’s HRA, a quarterly contribution greater than the contribution required for an employee averaging 20 hours per week, the employer won’t receive credit for its contribution unless the employee (i) actually uses the contributions and (ii) the employer demonstrates this at year’s end. This appears to be San Francisco’s way of depriving employers of the ability to recapture, at least with respect to employees working more than half time, HRA contributions made on behalf of such employees who subsequently terminate employment without incurring much in the way of claims.

Now What?

In light of all this, employers looking to use HRAs to satisfy their HCSO obligations might want to start by categorizing their employees:

  •  Category A: Employees not considered full-time employees (FTEs) under the ACA, and who averaged 20 or fewer hours per week over the relevant calendar quarter. As long as the “excepted benefit HRA” states (and is administered as such) that the employee may seek reimbursement for any and all of the excepted benefits in the bulleted list above, and the HRA meets existing HCSO requirements for HRAs (there are special rules for timing of claim submissions, etc.), the employer may take credit against its HCSO obligation for the amounts it credits to the HRA. There’s no obligation on the employer’s part to demonstrate the employee actually used the HRA benefit.
  • Category B: Employees not considered FTEs under the ACA, and who averaged more than 20 hours per week over the relevant calendar quarter. The employer might credit to the HRA a notional contribution equal to the HCSO-required expenditure for an employee averaging 20 hours per week for the quarter, and then satisfy the remainder of the HCSO expenditure obligation by making a contribution to Healthy San Francisco. There would again be no obligation on the employer’s part to demonstrate the employee actually used the HRA benefit. The employer would never recapture, upon the employee’s termination, the contribution made to Healthy San Francisco, but it would almost certainly recapture at least a portion of the amounts credited to the HRA. 
  • Category C: Employees considered FTEs under the ACA. These employees require an offer of health insurance satisfying “minimum value” (60 percent actuarial value) and “affordability” requirements under the ACA, or the employer risks penalties.  An excepted benefits HRA won’t qualify as ACA-compliant coverage; that is, it will not satisfy the employer’s “play or pay” obligation in 2015. To insulate itself from potential penalties, the employer must offer something more robust than the excepted benefits HRA.

     Recall, however, that under the ACA the employer will meet its play or pay obligation simply by offering  minimum value and affordable coverage, even if the employee declines the offer and the employer incurs no health insurance expense with respect to the employee.

    The mere offer doesn’t satisfy the HCSO, however, although employees may opt out of their HCSO protection by signing an opt-out form provided by the employer. Absent such an HCSO opt-out, the employer will have to make its HCSO-required expenditure for the employee, even if he or she declines the ACA-compliant offer of minimum value and affordable coverage. For example:

    • If that employee averaged more than 20 hours per week over the relevant calendar quarter, the employer might want to take the same approach it takes with Category B employees.
    • If the employee averaged 20 or fewer hours per week for the quarter, the employer might prefer to take the same approach it takes with Category A employees.

What if the employee enrolls in the ACA-compliant minimum value and affordable coverage? Unless the employer’s cost for that coverage equals or exceeds its required HCSO expenditure for the employee, the employer will have to up its ante in an amount equal to the difference between the employer’s cost for the ACA-compliant coverage and its HCSO-required expenditure (we’ll call that difference “the residual amount”).

If the residual amount is less than or equal to what the employer would pay for an employee averaging 20 or fewer hours per quarter, the employer could provide the residual amount as a credit to the excepted benefits HRA, just as it would for a Category A employee. If the residual amount is greater than that, the employer could choose to deal with it in the same manner it deals with Category B employees.

 Amending Your HRA

An employer that used an HRA in the past to meet the HCSO obligation, and that intends to use an “excepted benefits HRA” going forward, should amend its HRA by April 1, 2014, to reflect the coverage requirements described above. A newly amended HRA should meet the stated requirements by the date it is effective or April 1, 2014, whichever is later.

Excepted Benefits and Canceled Policies Tackled by Feds in Latest ACA Guidance

Posted by Jeannie Wilcox on December 24, 2013 | Be the First to Comment

Written by Mark Holloway, J.D.

‘Twas the Friday before Christmas, and federal regulators upheld their tradition of issuing regulatory guidance just before a major holiday. This latest installment proposes changes to the federal health reform law’s (the Affordable Care Act, or ACA) exemption for “excepted benefits”—specifically, including employee assistance programs (EAPs) and so-called “wraparound coverage,” and modifying the rules for self-funded dental and vision programs.

In addition, under pressure from the U.S. Senate, the Centers for Medicare and Medicaid Services (CMS) announced yet another exemption from the ACA’s individual mandate for 2014. The latest guidance allows individuals with cancelled individual health insurance policies to avoid the penalty next year.  Alternatively, these people can choose to purchase a catastrophic plan on the public health insurance exchanges or “marketplaces,” even though they might not otherwise be eligible (due to age) to purchase such policies. 

Each of these exemptions is discussed in greater detail below.

Additional Coverages Treated as “Excepted Benefits”

Certain types of ancillary coverage—such as dental and vision plans that provide limited services are considered “excepted benefits” under the ACA and not required to comply with the its insurance mandates, including the prohibition on annual and lifetime dollar limits on essential health benefits. Under the current rules, insured dental or vision coverage generally is an excepted benefit, even if bundled with major medical coverage. But in order for self-funded dental or vision coverage to qualify, employees must pay a separate premium if they elect that coverage.  In other words, if employees pay a single premium for their medical coverage and it includes dental or vision benefits, with no opportunity to opt out of the dental or vision coverage and pay a lower premium for the medical coverage only, then the dental or vision coverage is not an “excepted benefit” and is required to comply with the ACA mandates.

In an example of some good, rational regulatory thinking, the agencies have proposed to eliminate the requirement that employees pay an additional premium for self-funded dental or vision coverage in order for that coverage to qualify for the ACA exemption. If employees are merely given the opportunity to opt out of the self-funded dental or vision coverage, those benefits will be considered excepted benefits.

In a previous Alert, we reported on the federal agencies’ promise to propose treating employee assistance plans (EAPs), that do not provide significant medical benefits, as excepted benefits.  Now we have the officially proposed criteria. In order for EAP coverage to be treated as an “excepted benefit,” the coverage:


  • Cannot require an employee premium payment, apply cost-sharing or provide “significant” benefits in the nature of medical care. The agencies have asked for comments on this and have hinted that 11 or more EAP outpatient visits per year may be required for the benefit to quality as significant.
  • Cannot be coordinated with benefits under another plan:
    • Participants cannot be required to exhaust EAP benefits before qualifying for benefits (e.g., mental/nervous or substance abuse benefits) under any other group health plan.
    • Participant eligibility for EAP benefits cannot be dependent on participation in another group health plan.
    • EAP benefits must not be financed by another group health plan

“Wrap Around” Coverage as an Excepted Benefit

Some employers had asked the agencies whether it would be possible for an employer to provide supplemental coverage for employees who purchase individual insurance coverage through a marketplace. The agencies have now proposed an ACA exemption beginning in 2015 for this supplemental wraparound coverage. However, the proposed exemption comes with multiple strings attached, as noted below. The strings are so onerous that we are dubious that many, if any, employers will be interested: 

  1. The individual policy purchased through the marketplace cannot be grandfathered and cannot consist solely of excepted benefits.
  2. The wraparound coverage must provide coverage of benefits that are not “essential health benefits,” or must reimburse the cost of healthcare providers that are considered out of network under the individual policy, or do both of these things. The wraparound coverage may also provide benefits for cost sharing under the individual policy.
  3. The wraparound coverage must not provide benefits only under a coordination-of-benefits provision. For example, the wraparound coverage cannot be designed to pay only where the individual health policy does not cover all or part of a medical expense.
  4. The plan sponsor of the wraparound coverage must also offer coverage (the “primary plan”) that provides minimum value (actuarial value of at least 60 percent; we’ve referred to this as “qualifying” coverage) and that is affordable (no more than 9.5 percent of household income) for the majority of employees who are eligible for the primary plan. Only individuals eligible for this primary plan may be eligible for the wraparound coverage (even if the primary plan is not necessarily affordable to them).
  5. The total cost of coverage under the wraparound coverage must not exceed 15 percent of the cost of coverage under the primary plan.
  6. The wraparound coverage, whether insured or self-funded, cannot discriminate on the basis of health status and cannot have any preexisting condition limits. In addition, both the wraparound plan and the primary plan, to the extent self-funded, must satisfy the Tax Code’s rules found in Section 105(h) that prohibit discrimination in favor of highly compensated individuals. To the extent that the wraparound plan and the primary plan are insured, they must satisfy similar nondiscrimination rules that were added by the ACA with respect to insured plans.

Most employers, particularly those subject to the ACA’s “play or pay” mandate on employers, won’t be interested in offering this wraparound coverage due to the byzantine requirements. In addition, any full-time employees who are offered unaffordable coverage by the employer and qualify for subsidized coverage through a marketplace will result in an annual $3,000 nondeductible excise tax for the employer. It’s difficult to see why an employer would be interested in providing supplemental benefits to those employees with respect to whom the employer is paying a penalty.

Some small employers (those with fewer than 50 full-time equivalent employees) may have the greatest interest in pursuing wraparound coverage, since they will not incur the “play or pay” excise tax if individuals for whom employer-sponsored coverage is unaffordable obtain subsidized coverage through a marketplace. But we wonder how many small employers will be interested in complying with the byzantine prerequisites for offering wraparound coverage.

The Individual Mandate: Another Exception for 2014

Federal authorities last week carved out yet another exception to the health reform law’s individual mandate for 2014.  Individuals who had an individual policy canceled because it did not comply with the ACA will be eligible for a hardship exemption from the individual mandate in 2014.  Alternatively, these individuals have the option to purchase a catastrophic plan (plans with mega-deductibles) through a marketplace after completing a hardship exemption form and submitting documentation regarding their insurance policy cancellations.  Previously, catastrophic plans were only available on the marketplaces to individuals under age 30.

New Mexico Supreme Court Legalizes Same-Sex Marriage

Posted by Mark Holloway on December 20, 2013 | Be the First to Comment

The New Mexico Supreme Court unanimously ruled on December 19th that same-sex couples have the right to marry.  The court held that ”barring individuals from marrying and depriving them of the rights, protections and responsibilities of civil marriage solely because of their sexual orientation violated the Equal Protection Clause of the New Mexico Constitution.”  With the ruling, which takes effect immediately, New Mexico joins 16 other states and the District of Columbia in recognizing same-sex unions.

The justices rejected the argument that prohibiting same-sex marriage was necessary to safeguard the government’s “interest in responsible procreation and child rearing.”  “Procreation,” wrote the court, “has never been a condition of marriage under New Mexico law, as evidenced by the fact that the aged, the infertile and those who choose not to have children are not precluded from marrying.”

After eight of the state’s 33 counties began issuing marriage licenses to gay and lesbian couples earlier this year, all 33 county clerks across the state asked the court to provide a state-wide ruling.  By October 23, 2013, when the court heard arguments in the case, over 1,400 same-sex couples had already been married in New Mexico.  The court ruled that county clerks must issue marriage licenses to couples regardless of gender, and that licenses issued to same-sex couples prior to the ruling must be recognized.

The ruling also provides that religious clergy who do not agree with same-sex marriage are not required to perform marriage ceremonies for gay couples.

HHS Exchange Guidance Addresses Fee Payable by Employer Health Plans

Posted by Jeannie Wilcox on December 1, 2013 | Be the First to Comment

Posted on behalf of Mark Holloway, J.D. – Senior Vice President and Co-Director – Lockton Compliance Services

The U.S. Department of Health and Human Services (HHS) has issued proposed regulations that address the requirements that would apply to health insurance policies offered in the public insurance exchanges (aka marketplaces). The proposed rules codify some changes already announced by the federal regulators and provide further guidance on the calculation and payment of the transitional reinsurance fee.

Transitional Reinsurance Program

The transitional reinsurance fee is payable by insurers on behalf of insured major medical plans and by employers (or other plan sponsors) on behalf of self-funded major medical plans (although third-party administrators – TPAs – may pay the fee on behalf of self-insured plans). Stand-alone dental and vision programs and health flexible spending account programs are exempt from the fee (assuming they meet the definition of “excepted benefits” under the law). The fee is intended to help create a backstop for insurers covering high-risk individuals through the insurance exchanges.

For 2014, the tax is $63 per covered life ($5.25 per month). For 2015, the annual transitional reinsurance fee would drop to $44 per covered life ($3.67 per month). For 2015 and 2016, self-insured, self-administered plans would be exempt from the fee. In order to qualify, the self-funded plan could not use a third party administrator in connection with claims processing or adjudication (including the management of appeals) or plan enrollment. This exemption is intended to apply to self-administered multiemployer (union) health plans and would have limited application to most employer plans. 

HHS has clarified the reinsurance fee would only apply to major medical coverage that provides “minimum value”  (i.e., that has an actuarial value of at least 60 percent). Recall that for employers subject to the play or pay mandate, the employer’s offer of employee-only coverage must not only be considered affordable, it must also provide minimum value, or the employer risks penalties. Any coverage – either insured or self-funded – that fails to meet the minimum value threshold will be exempt from the transitional reinsurance fee.

Lockton comment: This clarification is good news for employers who want to offer “skinny plans” to employees as an alternative for lower-wage employees to satisfy the individual mandate.

For plans that use the Form 5500 method for determining headcount for the transitional reinsurance fee, the new rules change the references from “benefit year” (i.e., the calendar year) to “plan year”to clarify that a self-insured group health plan that operates on a noncalendar year may use the enrollment data on its Form 5500 to determine the number of enrollees with respect to whom it must pay the transitional reinsurance fee.

Lastly, as previously announced,HHS will collect reinsurance contributions in two installments: one part at the beginning of the calendar year following the applicable benefit year (e.g., $52.50 in January 2015 for the 2014 fee), and the remaining part at the end of the calendar year following the applicable benefit year (e.g., $10.50 in late 2015 for the 2014 fee).

Other Items That Apply in 2015

  • States that choose to operate their own exchanges would need to notify HHS by June 15 of the preceding year (previously the deadline was January 1 of the preceding year). 
  • The open enrollment period under the exchanges will extend beyond December 15 for an additional month (so that the open enrollment period for 2015 will run from November 15, 2014 to January 15, 2015).
  • The following limits on cost sharing will apply for non-grandfathered exchange policies: 
    • Out of pocket maximum: No greater than $6,750 for self-only and $13,500 for family
    • Maximum annual deductible for small group policies: No greater than $2,150 for self-only and $4,300 for family
  • New patient safety standards for exchange plans would apply in 2015, but no word yet on the reporting requirements that might apply to employer plans. 
  • HHS has unveiled a new minimum value calculator that health plans will use to determine whether they provide 60 percent actuarial value.
  • The federal government will continue to apply the 3.5 percent user fee on insurers who offer coverage on the federally-facilitated exchanges in order to recoup its costs for operating the exchanges.

Supreme Court to Review Contraceptive Coverage Mandate

Posted by Mark Holloway on November 26, 2013 | Be the First to Comment

The Supreme Court agreed to hear a new challenge to the Affordable Care Act (ACA), this time to decide whether for-profit corporations can refuse to provide insurance coverage for birth control drugs that violate the religious beliefs of the corporations’ owners.  The ACA requires that non-grandfathered health coverage include “preventive services”  — which includes the full range of approved contraceptives — at no out-of-pocket cost to the insured.   

When Catholic bishops objected to the requirement to provide contraceptives, the Administration exempted “religious employers,” including churches, from the mandate.  Federal authorities further modified the rule so that religiously affiliated schools, colleges and hospitals could avoid paying directly for contraceptives; instead, their insurers were told to cover the costs.   But the Obama Administration has refused to extend the exemption to include  private, for-profit corporations whose owners have religious objections to providing some or all contraceptives.

Several private employers have filed suits seeking an exemption from the contraceptive mandate.  One was brought by the family that owns Hobby Lobby, a chain of craft stores, and the Mardel chain of Christian bookstores.  The  family says they believe that life begins at conception and object to four of the twenty approved methods of birth control  — two types of intrauterine devices (IUDs) and the emergency contraceptives commonly known as Plan B and Ella.  The family is willing to cover other standard contraceptives for their full-time employees.

The Hobby Lobby case was heard by the federal 10th Circuit Court of Appeals, which ruled that forcing the company to comply with the contraceptive mandate would violate the Religious Freedom Restoration Act.  The court relied in part on the Supreme Court’s opinion in Citizens United, which said corporations had political speech rights just as individuals do.  The appellate court saw no reason the Supreme Court would recognize constitutional protection for a corporation’s political expression, but not its religious expression.

However, a second case went the other way.  The Third Circuit appellate court ruled that a Pennsyvania cabinet-making  company owned by a Mennonite family must comply with the contraceptive mandate.  Earlier in November, two more federal appellate courts also ordered the government to exempt private employers based on their religious objections to contraceptives.

Violating the contraceptive mandate could cost Hobby Lobby, in penalty taxes, $100 per day per employee.  Because Hobby Lobby has 13,000 employees, the penalty would come to over $1 million per day. 

The Supreme Court will probably hear the case in March 2014, followed by a decision in June.