Employer Payment of Individual Health Policies Not Permitted under the ACA (Benefit Minute)
The Department of Labor (DOL) and the Internal Revenue Service (IRS) continue to prohibit various types of arrangements whereby employers subsidize the purchase of individual health insurance policies by employees. Set forth below is an overview of the types of arrangements that are not permitted.
IRS Notice 2013-54
Last year, in IRS Notice 2013-54 and DOL Technical Release 2013-03, the agencies stated that Health Reimbursement Arrangements (HRAs) and Employer Payment Plans (EPPs) cannot be used to pay or reimburse an employee for the cost of an individual market health insurance policy. An HRA is reimbursement plan funded solely by the employer that may reimburse qualified medical expenses (including premiums). An EPP is any arrangement in which an employer directly pays for or reimburses the cost of an individual health insurance policy. An EPP includes salary reduction under a section 125 cafeteria plan.
The agencies view HRAs and EPPs as group health plans that are subject to the market reform provisions of the Affordable Care Act (ACA). Since these types of arrangements do not comply with two market reform requirements (the prohibition against annual dollar limits and the requirement to cover preventive care services without cost-sharing), they are not permitted under the ACA. The HRA or EPP cannot be “integrated” with the individual policies for purposes of complying with these requirements.
An employer is still permitted to maintain a payroll practice of forwarding after-tax wages to a health insurer for the purchase of an individual policy. This payroll practice is not considered a group health plan.
IRS Question and Answer
The IRS subsequently posted a question and answer on employer health care arrangements that discusses the consequences to an employer who does not establish a group health insurance plan but reimburses employees for premiums they pay for individual health insurance policies. The IRS states that these arrangements are EPPs which are considered to be group health plans subject to the market reform provisions of the ACA. Since such arrangements fail to satisfy the market reform requirements and cannot be integrated with the individual policies, employers may be subject to an excise tax penalty of $100 per day per employee (which is $36,500 per year per employee).
DOL Frequently Asked Questions
More recently, the DOL issued several frequently asked questions regarding premium reimbursement arrangements (FAQs about Affordable Care Act Implementation Part XXII).
In the first question and answer, the DOL states that an employer’s reimbursement of individual health insurance is considered a group health plan (subject to the ACA’s market reforms) whether the reimbursement is taxable or tax-free. This FAQ clarifies that an offer of taxable cash conditioned on the purchase of health insurance coverage is enough to establish a group health plan. Employers cannot avoid the group health plan label by making the reimbursement taxable.
In the second question and answer, the DOL states that an employer who offers only employees with a high claims risk the choice between enrollment in the group health plan or cash violates the nondiscrimination provisions of the Health Insurance Portability and Accountability Act (HIPAA). This is the case regardless of whether:
- the cash payment is taxable or tax-free;
- the employer is involved in the selection or purchase of the individual policy; or
- the employee obtains individual health insurance.
Although HIPAA allows for benign discrimination (i.e. more favorable treatment for an individual with an adverse health factor), the DOL has determined that such offers fail to qualify as benign discrimination because the high claim individual is not entitled to any benefit enhancements under the group health plan if the individual is not covered under the plan.
The third question and answer address a specific scheme whereby employees purchase individual health insurance policies on the Marketplace, qualify for a premium tax credit, and then have the cost of the individual policy reimbursed by the employer. As stated above, these types of arrangements are group health plans that fail to comply with the ACA. In addition, since employees are receiving reimbursements from their employers, they are ineligible for premium tax credits.
Excise Tax Penalties
The agencies continue to make it clear that individual market health insurance policies may not be paid or reimbursed by employers. Employers currently using or considering these types of arrangements should keep in mind the IRS’ caution that they may be subject to excise tax penalties of $100 per day per affected individual.