Health Care Reform: Effect of Employer HSA Contributions on Value Requirements for HDHP
One area of uncertainty for HSAs under health care reform has been the effect that employer HSA contributions will have in determining the value of an employer’s HDHP. This is relevant under the shared responsibility provisions, also known as the “play or pay” penalty taxes, and under the actuarial value rules that apply to qualified health plans offered on the health insurance Exchanges.
1. Interplay Between HSA Contributions and “Play or Pay” Penalty Tax
Beginning in 2015, certain large employers may be subject to a penalty tax unless they offer “minimum essential coverage” (other than excepted benefit coverage) to all full-time employees (and their dependents) under an eligible employer-sponsored plan. 84 In order to avoid the penalty, the coverage will need to meet an affordability requirement (which compares cost to income) and provide minimum value (i.e., it will need to pay at least 60% of the total allowed cost of benefits). The penalty tax is due if any full-time employee is certified to the employer as having purchased health insurance through an Exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. 84 Employers who provide coverage under an eligible employer-sponsored plan that does not meet the affordability and minimum value requirements may nevertheless avoid the tax to the extent employees actually participate in the plan (e.g., if participation is automatic—as is typically the case for HRAs but not for major medical plans). 85
The extent to which employer HSA contributions may be taken into account when determining whether another employer-sponsored plan—e.g., an employer’s HDHP coverage—provides minimum value has been addressed in both HHS and IRS guidance. In 2012, the IRS and Treasury announced their intent to follow an approach proposed by HHS for determining the actuarial value of qualified health plans offered through the Exchanges (discussed in the next subsection). That approach assumed that amounts contributed under an HSA arrangement would be used by the employee for cost-sharing, so “an appropriate portion” of employer contributions could be counted toward—i.e., added to—the value of the HDHP. 86 HHS subsequently issued final regulations identifying alternative methods for determining whether the percentage of a plan’s total allowed costs of benefits provided under the plan met the 60% minimum value threshold. Those regulations affirmed that employer-sponsored self-insured health plans, and insured group health plans that at the time of purchase are offered in conjunction with an HSA, could take HSA contributions into account. Those contributions will be counted toward the total anticipated medical spending, but adjusted to reflect the expected spending for health care costs in a benefit year. 87 The IRS and Treasury then followed with proposed regulations indicating (consistent with their earlier guidance and the HHS regulations) that all amounts contributed by an employer for the current plan year to an HSA offered in connection with an eligible employer-sponsored plan could be taken into account in determining the plan’s share of costs for purposes of minimum value and are treated as amounts available for first dollar coverage. 88
Example: Minimum Value and HSA Employer Contributions. A $1,000 HSA employer contribution is treated in the MV Calculator (a tool made available by HHS and IRS for determining minimum value) as if a plan with a $1,000 deductible is reduced to $0. The $1,000 HSA contribution does not get counted as $1,000 in the numerator of the MV Calculator (which represents the share of average allowed cost covered by the plan) because the equation is based on expected spending for a standard total population, not for individuals. Instead, the $1,000 contribution is counted as the average dollar value it would cost to reduce a $1,000 deductible to $0.†
†Minimum Value Calculator Methodology (Feb. 20, 2013) (as visited July 8, 2013).
2. Effect of HSA Contributions on Qualified Health Plan Values
Under health care reform, qualified health plans offered on the health insurance Exchanges will be required to provide specified levels of coverage for essential health benefits (EHB). These levels of coverage (labeled bronze, silver, gold, and platinum) represent percentages (60%, 70%, 80%, and 90%, respectively) of the expected EHB costs that a health plan will cover. The same coverage level requirement will also apply to other non-grandfathered coverage in the individual and small group markets.
Insurers were concerned that even the lowest coverage levels under these rules might not be met by HDHP unless employers’ HSA contributions could be taken into account. But HHS regulations now affirm that, when the actuarial value (i.e., the specified percentages) of these coverages is determined, annual employer contributions to an employee’s HSA can be taken into account as part of the HDHP benefit. 89 Consistent with its earlier guidance (and the guidance on determining minimum value discussed above), the regulations assume that the HSA amounts would be used to pay cost-sharing, and give those amounts the same credit toward the actuarial value of the linked HDHP as an identical amount of first-dollar coverage. Thus, a plan with a $1,000 deductible plus a $1,000 annual HSA contribution would have the same actuarial value as a plan with a $0 deductible.
How Will Insurers Know That HSA Contributions Are Made by an Employer? The agencies received comments relating to how the actuarial value credit provision for HSAs (and HRAs) would be implemented. In the preamble, the agencies indicated that insurers could rely on employer-provided information at the time the coverage was “purchased.” Presumably, insurers will not be responsible for employers that later curtail HSA contributions below amounts originally relied upon by the insurer.*
*PPACA; Standards Related to Essential Health Benefits, Actuarial Value, and Accreditation, 45 CFR Parts 147, 155, and 156, 78 Fed. Reg. 12833, 12850 (Feb. 25, 2013).
84 Code §4980H, which is effective for months beginning after December 31, 2013, was created by the Patient Protection and Affordable Care Act, Pub. L. No. 111-148 (2010) (PPACA) and amended by the Health Care and Education Reconciliation Act, Pub. L. No. 111-152 (2010) (HCERA). Notwithstanding the statutory effective date, in Notice 2013-45, 2013-31 I.R.B. ___, Q/A-2, the IRS announced that “no employer shared responsibility payments will be assessed for 2014.” The term “eligible employer-sponsored plan” is defined in Code §5000A(f)(2).
85 Code §36B(c)(2)(C)(iii).
86 IRS Notice 2012-31, 2012-20 I.R.B. 906.
87 45 CFR §156.145(d).
88 See Prop. Treas. Reg. §1.36B-6(c)(3), and Minimum Value of Eligible Employer-Sponsored Plans and Other Rules Regarding the Health Insurance Premium Tax Credit, 26 CFR Part 1, 78 Fed. Reg. 25909, 25911 (May 3, 2013) (noting that proposed regulations under Code §36B are “consistent with” the HHS regulations for actuarial value determinations, which treat current-year HSA contributions as amounts available for first dollar coverage).
89 45 CFR §156.135(c). See also Actuarial Value and Cost-Sharing Reductions Bulletin (Feb. 27, 2012) (as visited July 8, 2013).