Retirees

The ACA makes important changes to how employers can use the tax-advantaged status of HRAs to pay for employee health coverage.

Retirees

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Retiree-only Health Reimbursement Arrangements

The Affordable Care Act (ACA) makes important changes to how employers can use the tax-advantaged status of health reimbursement arrangements (HRAs) to pay for employee health coverage.  Since HRAs are group health plans, they are subject to some of the ACA mandates, such as the prohibition on annual dollar limits on the value of essential health benefits.  This prohibition is problematic for most HRAs since, by their very nature, they impose limits on the dollar value of benefits.

Guidance from the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) confirm that retiree-only HRAs (i.e., less than two participants in the HRA are current employees) are not subject to the ACA mandates, including the annual dollar limit prohibition.  Accordingly, employers may continue to offer retiree-only HRAs on a stand-alone basis.

These HRAs may reimburse retirees for the purchase of health insurance coverage, including coverage through the public Exchange.  However, the HRA will be considered minimum essential coverage for any month in which funds are retained in the account.  As a result, a retiree covered by the stand-alone HRA would be ineligible for a premium tax credit or cost-sharing subsidy.  Employers may want to consider giving retirees the choice to opt out of the HRA so that they may be eligible for subsidies through the Exchange.

Retiree Drug Subsidy

The Retiree Drug Subsidy (RDS) program was created by the Medicare Prescription Drug, Improvement, and Modernization Act (MMA).  The aim of the program was to encourage employers to continue providing high quality prescription drug benefits to retirees rather than shifting the employees to Medicare Part D.

In order to achieve the goal of encouraging employers to continue covering their retirees, the MMA provided a tax deductible subsidy equal to 28 percent of covered prescription drug costs for retirees.  Starting with the 2013 tax year, the ACA eliminated the ability of employers to claim tax deductions for retiree prescription drug costs that are reimbursed by RDS.  However, RDS payments may continue to be excluded from the employer’s taxable income.

Additional Information
Keenan’s Futuris Care Webpage
Controlling long-term costs for your retiree population is an important component of ensuring the long-term financial stability of your program. Our innovative Futuris Care program assists with controlling your GASB 45 liabilities, protecting the quality of benefits for your retirees and future retirees.