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.
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.