ERISAfire | HRAs and 1094/1095 Employer Reporting for Medium-Sized and Large Employers (50+ FTEs)

UPDATE:

The IRS changed positions yet again. Just one week after we published the original blog post, the IRS reversed itself in Notice 2015-68, which says that an employer's HRA that is integrated with its fully insured medical coverage will not be required to separately report the HRA coverage in Part III of Form 1095-C. Separate reporting will be required, however, if an employer's HRA covers people who have other medical coverage not sponsored by that same employer (e.g., an HRA that reimburses out-of-pocket expenses under a spouse's employer's plan).

So it's back to business as usual. Whew!

ORIGINAL POST:

Medium-sized and large employers whose plans have both insured medical and an HRA should take note. While analyzing the IRS' recent draft instructions for 1094/1095 reporting, we found something peculiar. In the draft instructions, the IRS indicates that employers with fully insured medical plans and health reimbursement arrangements (HRAs) will have to separately report the HRA coverage, meaning that many employers who thought they were exempt from reporting coverage information in Part III of Form 1095-C are not actually exempt.

Brief Background

 Beginning in 2016, the ACA requires insurers and certain employers to report to the IRS what is essentially eligibility and enrollment information. So-called "applicable large employers" (employers having 50 or more full-time equivalents) with insured medical coverage only report the offer-of-coverage information (i.e., eligibility information) in Parts I and II of Form 1095-C. Applicable large employers with self-insured coverage report eligibility and enrollment information using parts I, II and III of Form 1095-C. Technically, under ERISA and the Internal Revenue Code HRAs are, in fact, tiny self-insured medical plans. In all but the most unusual cases, though, HRAs supplement major medical coverage, so the benefits compliance community assumed that HRAs integrated with a major medical plan, regardless of whether insured or self-insured, would be considered supplemental coverage not requiring any reporting—a legitimate assumption given that other IRS guidance (here, here and Q&A-14 here) indicated special reporting for HRA coverage would not be required. Then, in the recently released draft instructions for Forms 1094 and 1095, the IRS took an about-face.

Reporting Required for HRAs Integrated with Fully Insured Medical Coverage

ACA employer reporting is required for what the ACA calls  “minimum essential coverage,” which includes most group health plans, but does not include excepted benefits (such as stand-alone dental or vision coverage). Also excluded is self-insured coverage that is considered a supplemental benefit. In the draft instructions for Form 1094-B and 1095-B (the “B” forms), the IRS states that HRAs integrated with a fully insured plan are not treated as supplemental coverage. According to the new IRS instructions, the supplemental benefit exception applies only when the primary and supplemental coverages have the same plan sponsor and the same reporting entity. It's the addition of this last phrase that changes the situation entirely.

Due to this IRS interpretation, an employer that offers an HRA integrated with a self-funded major medical benefit is not required to report the HRA coverage because the employer is the plan sponsor for both benefits and the employer is also the reporting entity for both benefits. However, in the case of an HRA integrated with a fully insured major medical benefit, the reporting entities are different. The insurance company is the reporting entity for coverage information and will be sending employees covered by the plan a Form 1095-B. But the employer is the reporting entity for the self-insured HRA and, according to this guidance, must report coverage information for the HRA.

Here's how the reporting works for medium-sized and large employers (employers with fewer 50 or more full-time equivalents) that have insured medical coverage and an HRA:

Reporting will be required in Part III of Form 1095-C for any employees and their dependents covered under the HRA.
HRA coverage of non-employees (COBRA beneficiaries, retirees covered non-employees such as non-employee director) and their dependents will be reported either in Part III of Form 1095-C or on Form 1095-B, at the employer’s discretion. (Filing on Form 1095-C makes sense for most employers because they’ll be sending a 1095-C to employees with information in Parts I and II anyway.)
Full-time employees will receive a Form 1095-C with biographic information in Part I and eligibility information in Part II, regardless of whether they are covered under the plan.
Full-time employees covered under the insured medical plan and the HRA will receive a Form 1095-C with biographic information in Part I, eligibility information in Part II and coverage information in Part III indicating coverage under the HRA; the employee will also receive a Form 1095-B from the insurance carrier for the fully-insured medical coverage.
Non-employees covered under the insured medical plan and HRA will receive a Form 1095-B from the insurance carrier for the fully insured medical coverage and either a second Form 1095-B or a Form 1095-C from the employer for the self-insured HRA coverage.
Note that an individual is covered if expenses incurred by that person are reimbursable under the plan; so even if the employee is the only one submitting claims, if the employee can submit claims incurred by his/her spouse or children, then those dependents are covered and must be reported.

Concluding Thoughts

 This revelation from the IRS means that some employers that originally assumed they were exempt from Part III of Form 1095-C are not in fact exempt and must separately report HRA coverage to employees and the IRS in early 2016 for the 2015 calendar year. Yes, these instructions are in draft form only, but we do not expect to see any significant changes in the final instructions.

For the most part, employers will easily be able report information for who is covered by the employer's HRA; however, some employers may struggle to obtain information (including names and SSNs) of covered dependents. Hopefully some coordination with the insurance carrier, who is also required to report this information for the fully-insured coverage, or the vendor who administers the HRA plan, will help to alleviate some of the administrative burden.