Health and Welfare

Notice 2015-87: Important Clarifications for HSAs, FSAs, and HRAs

On December 16, 2015 the IRS, in conjunction with the Departments of Labor and Health and Human Services released Notice 2015-87 for publication on December 28, 2015.  The summary below provides information about the items discussed in the Notice which we hope will be helpful for you as you make benefit plan decisions.   

The Notice addresses the following items of interest:


  • Retiree-only HRAs (HRAs covering fewer than 2 current employees) may be used to reimburse individual health premiums, though any individual with a balance in an HRA will not be eligible for premium subsidies. 
  • Current-employee HRAs may not be used to reimburse individual premiums, even if contributions to the HRA cease because the individual is no longer covered by integrated group health plan coverage.
  • Amounts credited to an HRA prior to January 1, 2014 under terms of an HRA in effect on January 1, 2013 may continue be used according to the terms of the HRA in effect on January 1, 2013.
  • HRAs which can reimburse medical expenses of the spouse and/or dependents of the employee cannot be integrated with self-only group health coverage.  The guidance suggests that the HRA could be designed to automatically adjust the level of HRA benefit based upon the type of group health coverage in which the employee is enrolled.  For instance, if the employee is enrolled in employee-only coverage, the HRA should specify that only the employee’s medical expenses may be reimbursed.  If the employee is enrolled in family coverage, then the expenses of the employee, the employee’s spouse, and the employee’s children may be reimbursed.  HRAs which were in effect on December 16, 2015 will be permitted to reimburse medical expenses of an employee’s family member regardless of the level of insurance coverage elected through the end of 2016.   
  • While an HRA may not be used to reimburse individual coverage premiums for health care, reimbursement of individual coverage premiums for excepted benefits (vision and dental only) is allowed.  However, the plan document must specify that reimbursement of individual coverage premiums is limited to excepted benefits.   
  • EPPs which reimburse individual market coverage under a Section 125 plan permitted in the proposed 125 regulations will not satisfy the market reform requirements and would be subject to the excise tax under Section 4980D.

4980H treatment of HRAs and flex credits:

  • Only HRAs which may be used by the employee to offset the premium cost for employer coverage may be considered (dollar-for-dollar) to reduce the required employee contribution for health care in determining whether the coverage offered by the employer is affordable.  This applies equally to HRAs which are limited to payment of the group health premiums as well as those that permit reimbursement of group health premiums and other eligible medical expenses.
  • Employer flex credits may be used to reduce the required employee contribution only if (a) the employee may not elect to receive unused credits as cash; and (b) the credits may be used to pay for minimum essential coverage but may not be used for any benefit that is not medical care.  Flex credits that may be used to offset premium costs and/or as health FSA contributions will offset the required employee contribution.  For 2016, flex credits which may be used for non-health benefits or elected as cash do not need to be counted as employee cost in the affordability calculation if the flex credit was in place prior to December 16, 2015.
  • Unconditional opt-out payments (additional cash payment to employees who opt out of employer-sponsored coverage without providing attestation of coverage under another group health plan) will be addressed in proposed regulations, but until then, for purposes of employer reporting under 6056 (form 1095C) the amount of the opt-out payment is not required to be included in the required employee contribution amount reported by the employer to the IRS.  Individual employees applying for premium tax credits, however, should include the amount of any opt-out payments regardless of whether they are conditioned upon an attestation of coverage in a spouse’s employer’s plan.


  • As a matter of administrative simplification, the IRS will consider medical care provided at a VA hospital to a veteran with a disability rating as being provided to a veteran with a service-connected disability.  Formerly, an individual who received any such treatment was ineligible to contribute to an HSA for a period of 3 months beginning with the month in which the treatment was received.  In July 2015, legislation was enacted which excluded VA hospital care provided to veterans with a service-related disability from the list of disqualifying events.  The IRS made this accommodation for all disabled veterans because it would be administratively infeasible to determine whether a veteran’s disability was due to a service-related incident or not.


  • FSA carryover amounts must be included when determining whether COBRA continuation notice is required when an individual experiences a qualifying event.  Thus, the amount available to the individual for purposes of this determination includes the balance of the current-year FSA as well as any remaining amounts rolled from a prior year.
  • However, when calculating the applicable COBRA premium, only the FSA election for the current year may be included. 
  • Carryover amounts available to a COBRA participant will remain available to the individual throughout the COBRA continuation period, even though that period may extend beyond the end of the plan year in which the qualifying event occurred.  The employer is not required to allow the individual to make a new election for subsequent plan years.  The applicable COBRA premium for any plan year after the plan year in which the qualifying event occurred will be $0.   

FSA Carryover

  • An employer may condition the availability of carryover amounts on the election by the employee of FSA benefits for the following plan year.  In other words, if the employer includes this limitation in the plan document, the carryover would be available only to participants making a current-year election.
  • A plan sponsor may also limit the length of time during which a carryover is available (for instance, the employer may require that any amounts carried forward will be available to an employee for only the following plan year.