On December 16, 2015, the IRS issued Notice 2015-87 (Notice) which provides question-and-answer guidance regarding how various Affordable Care Act (ACA) provisions apply to employer-provided health coverage. Although parts of the guidance address ACA rules that have been jointly implemented by the Departments of Labor, Health and Human Services and Treasury (the Departments), other aspects of the guidance are provided solely by Treasury and the IRS. The Notice expands on guidance provided in Notice 2013-54 and other earlier guidance (see Legal Update, Guidance Addresses the ACA's Impact on EAPs, HRAs and Health FSAs).

The Notice addresses a broad range of issues for employer-provided health coverage, including:

In most cases, the guidance in the Notice applies for plan years beginning on and after December 16, 2015.

Certain HRAs must be "integrated" with other group health plan coverage to comply with ACA market reforms that:

The Notice clarifies that an HRA for current employees fails to be integrated with another group health plan (and will therefore fail to satisfy the ACA market reforms) if amounts credited to the HRA may be used to purchase individual market coverage. The HRA in this case would be a group health plan that fails to satisfy the ACA's market reforms because it is not integrated with another group health plan.

Also, an HRA that may reimburse medical expenses of an employee's spouse and dependents (that is, a family HRA) may not be integrated with self-only coverage under an employer's group health plan. According to the IRS, some HRAs may have been intended to reimburse only limited expenses (for example, copayments), and employees may have used these HRAs for other family members' expenses regardless of whether the other family members were enrolled in the employer's group health plan. Transition relief in the Notice provides that the IRS generally will not treat an HRA that is available for the expenses of family members who are not enrolled in the employer's other group health plan for plan years beginning before January 1, 2016, as failing to be integrated with an employer's other group health plan.

In another question, the Departments indicated that an HRA that may be used only to reimburse (or to directly pay for) premiums for individual market coverage consisting only of excepted benefits (for example, dental coverage) does not fail to satisfy the ACA's market reforms. (Regarding excepted benefits, see Legal Update, Final Excepted Benefit Rules Address Limited Wraparound Coverage.)

The Notice reviews the rules for how HRA contributions are considered in determining whether a large employer has offered affordable minimum value coverage for ACA employer mandate and other purposes (see Practice Note, Defined Contribution Health Plans: HRA Contributions and Minimum Essential Coverage Under the ACA). The Notice also addresses how employer flex contributions to cafeteria plans are considered for affordability purposes (see Practice Note, Cafeteria Plans). Under implementing regulations, an employer flex contribution that is not a "health flex contribution" (that is, a contribution that meets specified criteria, including that the amount may only be used to pay for medical care under Section 213(d) of the Internal Revenue Code (Code)) does not reduce an employee's required contribution for affordability purposes.

However, the Notice includes limited transition relief, applicable for coverage for plan years beginning before January 1, 2017, under which an employer flex contribution that is not a health flex contribution because it may be used for non-health benefits generally will be treated as reducing the amount of an employee's required contribution for affordability purposes. This relief is not available for flex contribution arrangements offering non-health benefits that either:

In addition, for coverage for plan years beginning before January 1, 2017, an employer may reduce the amount of the employee's required contribution by the amount of most non-health flex contributions for ACA information reporting under Code Section 6056 (see Practice Notes, ACA Information Reporting: Forms 1095-C and 1094-C Line Instructions: Part II, Lines 14-16: Employee Offer and Coverage and Information Reporting of Health Insurance Coverage by Large Employers (Section 6056)).

Several questions in the Notice address the interaction of health FSA carryover amounts and COBRA coverage (see Practice Note, Cafeteria Plans and Legal Update, In Change to "Use-or-Lose" Rule, IRS Permits $500 Carryover of Health FSA Balances). In general, a health FSA need not offer COBRA coverage for the year that a qualifying event occurs if, as of the date of the qualifying event, the amount an individual may become entitled to for the rest of the year is more than the amount the health FSA may require for COBRA coverage for the rest of the year. Under the Notice, carryover amounts are included in determining the amount an individual is entitled to receive for the remainder of the year in which a qualifying event occurs.

However, the amount that a health FSA may charge for COBRA (that is, 102% of the applicable premium) does not include unused amounts carried over from prior years. Rather, the applicable premium is based only on the sum of:

In addition, a health FSA that allows carryovers of unused amounts for similarly situated non-COBRA beneficiaries must also allow carryovers by COBRA beneficiaries, applying the same terms as govern the non-COBRA beneficiaries. However, the health FSA need not allow COBRA beneficiaries to either:

Also, the maximum time that a carryover must be made available is limited to the period of COBRA coverage.

Under the Notice, penalty relief is available regarding the ACA information reporting rules from penalties for incomplete or incorrect returns filed or employee statements provided to employees in 2016 for coverage offered during 2015. For analysis of ACA information reporting, see Practice Notes, ACA Information Reporting: Forms 1095-C and 1094-C (Overview) and ACA Information Reporting: Employee Statements. Under the relief, the IRS will not impose penalties (under Code Sections 6721 and 6722) on large employers that can show they have made good faith efforts to satisfy the information reporting rules (26 U.S.C. §§ 6721-22). The relief is unavailable if an employer fails to timely file an information return or provide a statement, though large employers might be eligible for penalty relief involving reasonable cause standards (26 U.S.C. § 6724).

Similar penalty relief is available regarding the Code Section 6055 reporting requirements (see Practice Note, Information Reporting for Employers That Self-Insure and Insurers (Section 6055)).

The Notice clarifies the scope of implementing regulations under the ACA's employer mandate that define the term "hours of service" for purposes of full-time employee status by cross-referencing DOL regulations (see Practice Note, Employer Mandate Under the ACA: Determining Full-Time Employees for Employer Penalties: Calculating Hours of Service). However, the IRS did not intend that all aspects of the DOL regulation be incorporated. As a result, in determining whether an hour of service must be credited, a payment for service is deemed to be made by (or due from) an employer regardless of whether:

This means that periods for which an employee did not perform services but is receiving payments due to short-term or long-term disability generally result in hours of service while the recipient remains an employee, unless the payments are made from an arrangement to which the employer did not contribute directly or indirectly. Also, periods during which an employee is not performing services but is receiving workers compensation wage replacement benefits provided by a state or local government do not result in hours of service (see Practice Note, Workers' Compensation: Common Questions).

The Notice also addresses offers of coverage under TRICARE (the health program for military personnel, retirees, and their dependents) in determining potential employer mandate liability and for purposes of ACA information reporting (see Employer Mandate Toolkit and Practice Note, ACA Information Reporting: Forms 1095-C and 1094-C). Under the Q&A, an offer of coverage under TRICARE for any month due to employment (and which results in TRICARE eligibility) is treated as an offer by the employer of minimum essential coverage under an eligible employer-sponsored plan for that month (see Practice Note, Employer Mandate Under the ACA: Minimum Essential Coverage).