The Department of the Treasury and the Internal Revenue Service issued Notice 2016-17 in February 2016, providing temporary relief for institutions of higher education that offer subsidized health care coverage to student employees. Substantially identical guidance was issued at the same time by the Departments of Labor (DOL) and the Department of Health and Human Services (HHS).

Notice 2016-17 provides that the IRS, DOL and HHS (the Departments) will not assert that an institution of higher education violated the Affordable Care Act (ACA) market reform provisions if the institution offers student-employees a "premium reduction arrangement" in connection with their student health coverage. The notice defines a premium reduction arrangement as an arrangement "designed to reduce the cost of student health coverage (whether insured or self-insured) through a credit, offset, reimbursement, stipend, or similar arrangement." This enforcement relief applies for plan years beginning prior to January 1, 2017.

Background

The guidance in the notice on student health coverage is issued in the wake of questions that arose after the IRS published a series of notices and other guidance confirming that employer-sponsored health reimbursement arrangements (HRAs) and employer payment plans (EPPs) that pay or reimburse employees for some or all of premium expenses incurred for individual market health insurance coverage are subject to the ACA market reform provisions. (See Notices 2013-54, 2015-17 and 2015-87.) The ACA market reform provisions apply to employer-sponsored group health plans, which are plans offered to the employer's common law employees. This guidance concludes that HRAs or EPPs are employer-sponsored group health plans that would fail to comply with the ACA's prohibition on annual dollar limits under Section 2711 of the Public Health Service Act (PHS Act) or the requirement to provide certain preventive services without cost sharing under PHS Act section 2713.

Employer-provided HRA or EPP arrangements that are integrated with a group health plan do not violate the ACA market reform provisions, including the prohibition on annual dollar limits and no-cost preventive services. HRA or EPP arrangements that are used to reimburse or pay for individual market coverage, however, do not comply with the ACA market reform provisions. An HRA or EPP arrangement that fails to comply with the ACA market reform provisions may cause the sponsoring employer to be subject to an excise tax under Section 4980D equal to $100 per day, per affected participant, in addition to other possible penalties.

Student health insurance coverage is a type of individual market insurance coverage. Under regulations issued by the HHS, student health insurance coverage is a type of individual market coverage that is offered to students and their dependents under a written agreement between the institution of higher education and a health insurance issuer. (See HHS final regulations, 45 CFR 147.145.)¹

Many colleges and universities offer health care coverage at no cost or greatly reduced cost to students (typically graduate students) who provide services to the institution, such as teaching or research services. This premium reduction health coverage is generally provided through the institution's student health plan.

Following the issuance of the IRS guidance on HRAs and EPPs, institutions of higher education raised questions on how the ACA market reform provisions apply to their student premium reduction health coverage arrangements. Because the institution's graduate students would be considered its common law employees if their teaching, research or other services were directed and controlled by the institution, the institution's premium reduction health care arrangement would be considered an employer-sponsored group health plan that would violate ACA market reform provisions if it is integrated with an individual market health care coverage (i.e., an insured student health plan), rather than a group health plan.

Transition relief

The Departments recognized that some institutions of higher education may not have realized that the student health premium reduction arrangements integrated with student health insurance coverage or other individual market coverage may constitute a non-compliant HRA or EPP group health plan. To provide institutions time to determine whether their arrangements comply with the ACA, Notice 2016-17 provides that the Departments will not take enforcement action against a higher education institution's premium reduction arrangements offered in connection with student health coverage for plan years beginning before January 1, 2017.

Implications

Notice 2016-17 provides institutions of higher education with welcome transition relief through the end of 2016, but it raises a number of issues that colleges and universities will need to consider.

Institutions of higher education should consider whether their graduate students are their common law employees. Because students who provide services on a non-full-time basis and satisfy other requirements are not subject to FICA and may also be exempt from certain Fair Labor Standards Act (FLSA) wage and hour rules, many institutions may not have focused on the fact that their graduate students who provide teaching, research or other services could be their common law employees. Premium reduction arrangements offered to the students who are common law employees would be subject to the ACA market reform requirements.

Institutions of higher education should review their graduate student (and other student) premium reduction health care arrangements to determine whether changes need to be made to comply with the ACA market reform requirements. If the premium reduction arrangement is combined with an insured student health plan or other individual market policy, it may need to be modified to comply with the ACA market reform provisions. Alternatively, a premium reduction arrangement that is integrated with a self-funded student health plan may not violate the ACA market reform provisions because it may be treated as being integrated with a group health plan, rather than an individual market plan. Such self-funded student health plans raise other ACA and ERISA issues, however, that will need to be considered.

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ENDNOTES

¹ In a final rule issued in 2013, HHS provided that self-funded student health plans would be deemed to be minimum essential coverage for policy years beginning on or before December 31, 2014. 45 CFR 155 and 156. Thereafter, institutions of higher education and other schools that sponsor self-funded student health plans must apply to HHS to receive approval that the plan constitutes minimum essential coverage. Self-insured student health plan would not be considered individual market coverage because the coverage is not insured through a policy offered on the market.