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HSAs, HRAs, and the affordability and the minimum value tests

May 10, 2013

By Scott Lyon, Senior Vice President

As we head into the summer, it seems that the folks in Washington are ramping up the release of various regulations for the Affordable Care Act. On May 3, the IRS issued proposed regulations of the income tax credit that some employees may be eligible for when purchasing coverage on the Marketplace.  This same regulation, of course, has implications for the Employer Mandate/Shared Responsibility/Play or Pay requirements, specifically how employer contributions to Health Savings Accounts and Health Reimbursement Arrangements will be treated.

Remember that an Applicable Large Employer (50 or more FTE) could be subject to a play or pay penalty if the provided plan is either unaffordable or does not meet the minimum value requirements.  A plan is unaffordable if the cost to an employee is greater than 9.5 percent of their W-2 Box 1 income for employee-only coverage.  A plan does not meet minimum value if it does not cover the cost of at least 60 percent of essential health benefits.

So, what does all that mean to HSAs and HRAs?  The proposed regulations address both contributions and will help employers avoid potentially costly mistakes for getting it wrong and misclassifying contributions. 

HSA Contributions – Remember first that HSA contributions cannot be used to pay premiums and therefore they do not impact the affordability test.  However, a contribution to an HSA can be used to satisfy the 60 percent minimum value test.

HRA Contributions – HRA contributions allow some additional flexibility. Depending on how the plan documents are constructed, HRA contributions can be used to pay premiums or to make reimbursements for medical expenses and therefore could impact either the affordability or minimum value tests and maybe both.

Probably the best way to show this is in a simple chart:

 Affordability Test Minimum Value Test
Employer HSA Contribution
No – HSA Contribution can’t be used to pay premiumsYes
Employer HRA Credit
Yes – If amounts may be used to pay premiums or medical expensesYes – but only if the credit amount may not be used to pay premiums 

So far, this seems to be relatively straightforward.  So, when or why does this matter?  It matters when you receive your next rate renewal and are looking for ideas on how to offset the premium increase and still remain compliant with the rules and regulation of the Affordable Care Act.  HSAs and HRAs may be just the mechanism that you need.

Additional guidance was offered for wellness programs, but because so few small businesses offer a standalone wellness program, I only raise this to your attention and will direct you back to the IRS proposed regulation dated May 3, 2013 for additional information.

If you have questions, please contact your independent insurance agent or your HSA and HRA plan administrator (and remember – how the plan documents are structured is critical).

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