These FAQs state: HRA Prohibition May Have Broader Affects

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1 May 20, 2013 Secretary Sebelius Department of Health and Human Services Hubert H. Humphrey Building 200 Independence Avenue, S.W. Washington, DC Secretary Lew Department of the Treasury 1500 Pennsylvania Avenue, N.W. Washington, DC Acting Secretary Harris Department of Labor 200 Constitution Avenue, N.W. Washington, DC Re: Legality of Employer Subsidies for Individual Health Insurance Dear Secretaries Sebelius and Lew and Acting Secretary Harris: The U.S. Chamber of Commerce ( Chamber ) and representatives from several of our member companies met with officials from your Departments on March 13, 2013, to discuss the underpinnings and implications of the Department of Labor s document FAQs about Affordable Care Act Implementation Part XI issued on January 24, 2013, regarding the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 ( PPACA ). 1 Background The U.S. Chamber of Commerce is the world s largest business federation representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations, and remains dedicated to promoting, protecting, and defending America s free enterprise system. More than 96 percent of the Chamber s members are small businesses with 100 or fewer employees, 70 percent of which have 10 or fewer employees. Yet, virtually all of the nation s largest companies are also active members. Therefore, we are particularly cognizant of the problems of smaller businesses, as well as issues facing the business community at large. Besides representing a cross-section of the American business community in terms of number of employees, the Chamber represents a wide spectrum of business type and location. Each major classification of 1 See

2 American business -- manufacturing, retailing, services, construction, wholesaling, and finance is represented. These comments have been developed with the input of member companies with an interest in improving the health care system. These FAQs state: Section 2711 of the PHS Act, as added by the Affordable Care Act, generally prohibits plans and issuers from imposing lifetime or annual limits on the dollar value of essential health benefits.... The preamble [to interim final regulations under Section 2711] stated that [w]hen HRAs are integrated with other coverage as part of a group health plan and the other coverage alone would comply with the requirements of PHS Act section 2711, the fact that benefits under the HRA by itself are limited does not violate PHS Act section 2711 because the combined benefit satisfies the requirements. (75 FR 37188, at ). The corollary to this statement is that an HRA is not considered integrated with primary health coverage offered by the employer unless, under the terms of the HRA, the HRA is available only to employees who are covered by primary group health plan coverage provided by the employer and meeting the requirements of PHS Act section Questions 2 through 4 below address certain issues relating to HRAs. The Departments anticipate issuing future guidance addressing HRAs. Q2: May an HRA used to purchase coverage on the individual market be considered integrated with that individual market coverage and therefore satisfy the requirements of PHS Act section 2711? No. The Departments intend to issue guidance providing that for purposes of PHS Act section 2711, an employer-sponsored HRA cannot be integrated with individual market coverage or with an employer plan that provides coverage through individual policies and therefore will violate PHS Act section Footnote 2 to the FAQs recognizes that retiree health plans that cover no more than one current employee (Retiree Plans) are not subject to the annual limit proscription, making Q&A2 irrelevant to them. The Chamber respectfully urges the Departments of Labor, Treasury, and Health & Human Services ( the Departments ) to reverse this health reimbursement arrangement ( HRA ) position for the reasons set forth in this letter and to provide additional guidance promptly to employers about their position. Finally, to the extent the Departments do not reverse this position, the effective date should be delayed a year to give employers the time they will need to comply with it. HRA Prohibition May Have Broader Affects An HRA is a particular kind of employer health subsidy essentially a flexible savings account ( FSA ) funded solely by an employer under which unused employer contributions can be rolled over from year to year. Based on our meeting, the Chamber understands that the Departments believe that any employer subsidy to buy individual health insurance (except a Retiree Plan subsidy) violates Page 2 of 5

3 PPACA s annual limit proscription. Based on this stated position, we understand the Departments position to be much broader than the opinion that has been publicly expressed. We believe that employers around the country are completely unaware that in nine months time, the Departments intend to prohibit many common arrangements arrangements likely far more common than the HRAs proscribed by the FAQ. Under these non-hra arrangements, employers typically reimburse employees for all or part of the cost of the individual coverage they obtain. The Internal Revenue Service ( IRS ) long ago concluded that such arrangements qualify as tax-free employer-provided health coverage under Internal Revenue Code Section 106. Rev. Rul , CB 25. In reliance on this long-standing guidance, some employers including many small businesses have entered into enforceable, multi-year contracts with employees to subsidize individual insurance coverage. We believe that interpreting the PPACA as prohibiting such arrangements runs counter to the central goals of the PPACA, which are to make health insurance coverage more affordable and to increase the number of individuals insured in the United States. The Departments View Would Undermine the PPACA s Central Goals It is clear that that the Departments believe it is lawful for an employer to provide a fixed dollar subsidy to employees (e.g., under an HRA) who buy coverage under the employer s own PPACAcompliant group insurance plans because the subsidy and the group insurance plan coverage is PPACA-compliant in the aggregate. We fail to see why the same would not be true as to the employer-subsidized purchase of PPACA-compliant insurance coverage in the individual market. In our meeting, the Departments gave us three reasons why they were making this distinction. 1. Distinction Between An Aggregated Employer Sponsored Program Coverage and Separate Components The first was that an employer s subsidy for health coverage is a group health plan as is the employer-sponsored coverage; hence, the two group health plans can be aggregated and treated as a single program. The Departments assert that the same is not true when employer subsidies are used to buy PPACA-compliant individual market coverage. Hence, even though the subsidy and the coverage in the aggregate meet the requirements of the PPACA, if the two components are viewed separately, the subsidy violates the annual limit rule. We believe that the definition of group health plan could easily accommodate integration of employer-subsidized individual coverage with the subsidy, treating the aggregate as a group health plan Concern that Sick Populations Will Flood the Individual Market The Departments expressed concerns that permitting employers to subsidize individual market coverage would encourage employers with sicker-than-average work forces to abandon the group insurance market. This concern is understandable, but the PPACA does not require employers to 2 Section 2791(a) of the Public Health Service Act states that The term group health plan means an employee welfare benefit plan (as defined in section 3(1) of the Employee Retirement Income Security Act of 1974 [29 U.S.C. 1002(1)]) to the extent that the plan provides medical care (as defined in paragraph (2)) and including items and services paid for as medical care) to employees or their dependents (as defined under the terms of the plan) directly or through insurance, reimbursement, or otherwise. Page 3 of 5

4 provide health coverage; rather the law imposes a tax penalty on large employers that do not offer a PPACA-compliant plan. National surveys have shown that employers may abandon the group insurance market if it makes economic sense to do so. The inability of employers to subsidize individual insurance is not likely to materially influence that decision. If anything, it is more likely to cause the worst possible result for employees the loss of both group coverage and employer subsidies. 3. Concern About Double Dipping The third reason is that the Departments are concerned about double dipping, i.e., letting employees buy federally subsidized coverage on the exchanges with tax-free employer reimbursement. We believe that this concern could be adequately addressed through further rulemaking. If an HRA or other employer subsidy of an otherwise PPACA-compliant individual health plan is permitted, an employee would likely be ineligible for federal subsidies. 3 Manipulating the annual limit rule to prevent a practice that the PPACA did not itself prohibit does not seem appropriate. Even if the Departments reasoning had merit, interpreting the annual limit rule to impose proscriptions that the PPACA does not itself impose likely exceeds the Departments rule-making authority. Equally important, there are other ways of addressing these concerns than the overly broad approach of banning all employer-provided individual insurance subsidies. A Better Way We strongly urge the Departments to reverse course and declare that HRAs and other employersubsidies that allow employees to buy PPACA-compliant individual market insurance policies do not violate the annual limit. A balanced approach would consider an HRA or other employer subsidy earmarked for the purchase of individual insurance coverage to be aggregated for purposes of determining whether core PPACA requirements are met. We believe that the position of the Chamber and its member companies would promote the central goals of the PPACA. Allowing employers to subsidize individual coverage will help make coverage more affordable. Employer subsidies will also make it more likely that Americans will be covered. To alleviate the Departments concern about double-dipping, we would encourage the Departments to provide guidance regarding whether and when employer-subsidized PPACA-compliant individual coverage purchased from exchanges is eligible for the Section 36B credit. Although such coverage might be eligible for the credit if the employer subsidy is too small to make coverage affordable, in footnote 3 we have suggested an approach the Departments could take to make it unavailable even in that case. As for the Departments concerns that reversing course would encourage employers to discontinue group coverage, the Departments should caution that cherry-picking initiatives will not be tolerated. For example, the Departments should remind employers that offering group insurance to healthy employees and subsidies or other incentives to unhealthy employees to buy coverage on the individual 3 Internal Revenue Code (Code) Section 36B(c)(2)(A)(ii) could preclude federal subsidies because it makes them available only if the taxpayer paid for the coverage. This could preclude subsidies because the employer has paid some or all of the cost of coverage. Page 4 of 5

5 exchanges may be illegal health underwriting or violate the Employee Retirement Income Security Act s ( ERISA s ) Section 510. In the event that the Departments determine that their current position with respect to HRAs (and by extension any other employer subsidy) stands, we strongly encourage the Departments to postpone the effective date for at least another year. The Departments should also extend the effective date for subsidies provided under a binding written contract (in effect as of a specific date) to the earliest date the subsidy can be discontinued without breaching the terms of the contract. Conclusion We urge the Departments to continue to work carefully, pragmatically, and cooperatively with the business community to minimize burdens placed on employers as they work to comply with the law. We remain committed to the employer-sponsored system and hope the Departments will consider the effects that various implementation choices will have on employers and their ability to continue to offer the coverage that their employees value. Sincerely, Randel K. Johnson Senior Vice President Labor, Immigration, & Employee Benefits U.S. Chamber of Commerce Katie Mahoney Executive Director Health Policy U.S. Chamber of Commerce Page 5 of 5