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IRS Permits New Benefits in High Deductible Health Plans

July 22 - Posted at 6:00 PM Tagged: , , , , , ,

The IRS has recently issued Notice 2019-45, which increases the scope of preventive care that can be covered by a high deductible health plan (“HDHP”) without eliminating the covered person’s ability to maintain a health savings account (“HSA”).

Since 2003, eligible individuals whose sole health coverage is a HDHP have been able to contribute to HSAs. The contribution to the HSA is not taxed when it goes into the HSA or when it is used to pay health benefits. It can for example be used to pay deductibles or copays under the HDHP. But it can also be used as a kind of supplemental retirement plan to pay Medicare premiums or other health expenses in retirement, in which case it is more tax-favored than even a regular retirement plan.

As the name suggests, a HDHP must have a deductible that exceeds certain minimums ($1,350 for self-only HDHP coverage and $2,700 for family HDHP coverage for 2019, subject to cost of living changes in future years). However, certain preventive care (for example, annual physicals and many vaccinations) is covered without having to meet the deductible. In general, “preventive care” has been defined as care designed to identify or prevent illness, injury, or a medical condition, as opposed to care designed to treat an existing illness, injury, or condition.

Notice 2019-45 expands the existing definition of preventive care to cover medical expenses which, although they may treat a particular existing chronic condition, will prevent a future secondary condition. For example, untreated diabetes can cause heart disease, blindness, or a need for amputation, among other complications. Under the new guidance, a HDHP will cover insulin, treating it as a preventative for those other conditions as opposed to a treatment for diabetes.

The Notices states that in general, the intent was to permit the coverage of preventive services if:

  • The service or item is low-cost;
  • There is medical evidence supporting high cost efficiency (a large expected impact) of preventing exacerbation of the chronic condition or the development of a secondary condition; and
  • There is a strong likelihood, documented by clinical evidence, that with respect to the class of individuals prescribed the item or service, the specific service or use of the item will prevent the exacerbation of the chronic condition or the development of a secondary condition that requires significantly higher cost treatments.

The Notice is in general good news for those covered by HDHPs. However, it has two major limitations:

  • Only the specific treatments covered by the Notice are covered. Even if other treatments may meet the three-pronged test described above, they are not permitted to be covered. For example, selective serotonin reuptake inhibitors (SSRIs) can be covered for a person who has depression. However, bupropion (which is similar in cost but affects brain chemicals other than serotonins) cannot be covered. Some people respond better to SSRIs, while others respond better to bupropion. The former can have their medications covered by a HDHP, while the latter cannot.
  • The Notice specifically says that male sterilization services (vasectomies) cannot be covered. This is an issue for two reasons. First, it means that while a HDHP can cover tubal ligations for women, it cannot cover the less expensive and less invasive comparable surgery for men. Some have suggested that this results in financial pressures on women, rather than their male partners, to undergo surgery. Second, many state laws require that health insurance cover vasectomies. In those states, anyone with health insurance (as opposed to an employer’s self-insured plan) will not be able to have an HSA.

Given the expansion of the types of preventive coverage that a HDHP can cover, and the tax advantages of an HSA to employees, employers who have not previously implemented a HDHP or HSA may want to consider doing so now. However, as with any employee benefit, it is important to consider both the potential demand for the benefit and the administrative cost.

Many employers originally thought they could shift health costs to the government by sending their employees to a health insurance Exchange/Marketplace with a tax-free contribution of cash to help pay premiums, but the Obama administration has squashed this idea in a new ruling. Such arrangements do not satisfy requirements under the Affordable Care Act (ACA), the Obama administration said, and employers could now be subject to a tax penalty of $100 a day — or $36,500 a year — for each employee who goes into the individual Marketplace/Exchange for health coverage.

 

The ruling this month, by the Internal Revenue Service, prevents any “dumping” of employees into the exchanges by employers.

 

Under a main provision in the health care law, employers with 50 or more employees are required to offer health coverage to full-time workers, or else the employer may be subject to penalties.

 

Many employers had concluded that it would be cheaper to provide each employee with a lump sum of money to buy insurance on an exchange, instead of providing employer-sponsored health coverage directly to employees as they had in the past.

 

But the Obama administration has now raised objections in an authoritative Q&A document recently released by the IRS, in consultation with other agencies.

 

The health law, known as the Affordable Care Act (ACA), was intended to build on the current system of employer-based health insurance. The administration wants employers to continue to provide coverage to workers and their families and do not see the introduction of ACA as an eventual erosion of employer provided coverage.

 

Employer contributions to sponsored health coverage, which averages more than $5,000 a year per employee, are not counted as taxable income to workers. But the IRS has said employers could not meet their obligations under ACA by simply reimbursing employees for some or all of their premium costs from the marketplace/exchange.

 

Christopher E. Condeluci, a former tax and benefits counsel to the Senate Finance Committee, said the recent IRS ruling was significant because it made clear that “an employee cannot use tax-free contributions from an employer to purchase an insurance policy sold in the individual health insurance market, inside or outside an exchange.”

 

If an employer wants to help employees buy insurance on their own, Condeluci said, they can give the employee higher pay, in the form of taxable wages. But in such cases, he said, the employer and the employee would owe payroll taxes on those wages, and the change could be viewed by workers as reducing a valuable benefit.

 

A tax partner from a large accounting firm has also said the ruling could disrupt reimbursement arrangements used in many industries.

 

For decades, many employers have been assisting employees by reimbursing them for health insurance premiums and out-of-pocket costs associated with their health coverage. The new federal ruling eliminates many of those arrangements, commonly known as Health Reimbursement Arrangements (HRAs) or employer payment plans, by imposing an unusually punitive penalty. The IRS has said that these employer payment plans are considered to be group health plans, but they do not satisfy requirements of the Affordable Care Act for health coverage.

 

Under the law, insurers may not impose annual limits on the dollar amount of benefits for any individual, and they must provide certain preventive services, like mammograms and colon cancer screenings, without co-payments or other charges.

But the administration has said that employer payment plans or HRAs do not meet these requirements.

 

This ruling was released as the Obama administration rushed to provide guidance to employers and insurers who are beginning to review coverage options for 2015.

 

The Department of Health and Human Services said it would provide financial assistance to certain insurers that experience unexpected financial losses this year. Administration officials hope the payments will stabilize medical premiums and prevent rate increases that are associated with the required policy changes as a result of ACA.

 

Republicans want to block these payments, however, as they see them as a bailout for insurance companies who originally supported the president’s health care law.

 

Stay tuned for more updates on ACA as they are released. Should you have any questions, please do not hesitate to contact our office. 

Our topic this month covers the Final Rule from HHS and the Exchanges.

 

Areas discussed include:

 

  • Changes to Preventative Services including OTC medications, immunizations, and FDA approved contraceptive methods

 

  • Pay or Play Rule and how to avoid the Pay or Play Rule penalties

 

  • Penalties Based on Subsidy Eligibility

 

  • Health Insurance Exchange

 

  • Small Business Health Options Program (SHOP)

 

 

Contact us today for more information on this topic.

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