Changes in the Health Care Reform (HCR) Law are far-reaching and will impact all aspects of the health care delivery system. While the long-term impact is difficult to predict, here is a quick chronological rundown of the provisions that will likely have the most significant impact:
Annual Benefit Cap Prohibition Likely Will Impact HRAs.
- Health reimbursement arrangements (HRA) are defined-contribution type plans that provide a fixed level of coverage based upon the individual’s HRA account balance. Under the HCR Law, beginning the first plan year on/after Sept. 23, 2010, health plans my not impose lifetime limits and only restricted annual limits on the value of essential benefits for any participant or beneficiary. While the HCR Law does not specifically address HRAs, it is possible that the regulators may view a stand-alone HRA (i.e., an HRA that is not linked to primary health coverage) as violating the prohibition on annual benefit caps. HRAs limited to vision and dental benefits and HRAs linked to compliant primary coverage (e.g., as part of a single ERISA-covered plan) should continue to be permitted. It is likely that HRAs that provide retireeonly coverage may continue notwithstanding the prohibition on annual and lifetime benefit caps.
Effective Jan. 1, 2011, OTC medicine and drug claims require a prescription.
- Effective Jan. 1, 2011 (regardless of plan year), claims for OTC medicines and drugs will require a prescription to be eligible as a tax-free benefit. Health benefit cards that currently have automated adjudication procedures (e.g., IIAS) for OTC expenses will need to be adjusted and manual claims processes implemented for such expenses (e.g., by incorporating physician approval into the process).
It should be noted that this new requirement does not apply to all OTC products—just medicines and drugs. OTC bandages and contact lens solution should continue to qualify as they do under current rules. Moreover, the HCR Law does not further describe the type of “prescription” that may be required (presumably any written recommendation from a medical practitioner or physician will be adequate) or how recent the prescription may need to be. (For example, some third party administrators are recommending that Flexible Spending Accounts (FSA)/ HRA participants obtain a single physician prescription/ recommendation for all required OTCs at the time of their next visit or physical exam.)
Plan sponsors should begin to communicate the change to FSA/HRA participants prior to any new enrollment and as far ahead as possible prior to the effective date.
Effective Jan. 1, 2013, cap of $2,500 on health FSA elections funded by salary reduction.
- The HCR Law imposes a cap on health FSA contributions made by employee salary reductions at $2,500. The cap will be especially burdensome for families and individuals with chronic conditions that necessitate high out-of-pocket health care expenses. Moreover, since the cap would be indexed at Consumer Price Index (a rate slower than health care inflation), the real buying power for salary reduction-funded FSA benefits would be reduced over time. The cap does not apply to HRA or HSA expenditures. Moreover, FSA funds that are attributable to employer funds other than employee salary reductions (such as employer seed money contributions or contributions through wellness programs) are not subject to the cap.
Stricter (20%) penalty for HSA distributions used for nonmedical purposes.
- Beginning in 2011, the excise tax penalty associatedwith withdrawing HSA funds for nonmedical purposes is increased to 20%.
Potential excise tax on “Cadillac Plan” coverage.
- Beginning in 2018, the HCR Law would impose a 40% excise tax on the value of health coverage that exceeds specified (indexed) monthly amounts (1/12 of $10,200 for single coverage and 1/12 of $27,500 for family coverage).This excise tax considers all forms of employer health coverage (including FSAs, HRAs and HSAs). Individual account-based benefits will likely be adversely affected (i.e., “crowded out”) as the cost of basic health coverage approaches the caps.
John Hickman is a partner in the Atlanta office of Alston & Bird LLP, where he heads up the firm’s health benefits practice. Hickman is a pioneer in the consumer-directed health care arena, working closely with financial institutions, as well as the IRS, Treasury, and Department of Labor in developing guidance for tax-favored health reimbursement arrangements and health savings accounts. He can be reached at John.Hickman[at]alston.com.