In the past, employers were able to reimburse employees for the cost of their individual medical policies, on a tax-free basis per Internal Revenue Code §106. Since federal subsidies are now available for individual policies purchased through the Health Insurance Marketplace, federal agencies do not want employers to incentivize employees to purchase their own coverage. Therefore, substantially identical guidance was issued by the IRS, Notice 2013-54, and the DOL, Technical Release 2013-03. Under this guidance, as of January 1, 2014, employers will violate the ACA and be subject to excise taxes ($100 per day per employee) if they provide pre-tax reimbursement to employees or allow pre-tax salary reductions through a cafeteria plan to pay for individual policies. This prohibition applies to all individual medical policies, whether purchased through the Marketplace or direct from an insurance carrier. The only exception applies to small employers who meet the qualifications for a QSEHRA which allows for limited reimbursement of individual coverage if group health coverage is not otherwise offered.
The reasoning within the guidance is that “employer payment plans” are considered group health plans under ERISA when the reimbursement is tied to the employee’s other health insurance coverage. Group health plans are now subject to ACA reforms and cannot have annual dollar limits for essential health benefits. Therefore, since premium reimbursement plans cover essential health benefits and include an annual dollar limit, they may violate the ACA.
Taxable reimbursements conditioned on the purchase of an individual policy also create a group health plan with dollar limits in violation of the ACA. However, taxable payments forwarded to insurers for individual policies may be permissible if (1) the employee is given the choice to receive the cash or have the payment applied to individual coverage and (2) the arrangement meets ERISA’s definition of a voluntary plan. To meet this definition, the employer cannot endorse or contribute towards the cost of coverage.
Group health plans that provide retiree-only coverage or “excepted benefits” are not subject to ACA reforms. Excepted benefits include plans that are limited to dental/vision coverage if offered separately from the group medical coverage. These plans can have dollar limits and can continue to be reimbursed on a tax-preferred basis.
In summary, in order for an employer payment or reimbursement plan to be in compliance with the ACA:
- Reimburse or pay for a current employee’s individual medical policy on a tax-free basis.
- Allow employee pre-tax salary reductions for the cost of an individual medical policy.
- Pay for or reimburse an employee’s individual medical policy on a taxable basis.
- Provide a Health Reimbursement Arrangement (HRA) to reimburse former employees (retirees) on a tax-free basis for their group or individual coverage. Due to IRS double-dipping rules, the HRA cannot reimburse for coverage that is paid for with pre-tax dollars.
- Provide an HRA to reimburse current employees on a tax-free basis for other group coverage (retiree, COBRA), as long as the HRA is integrated with a group health plan. Due to IRS double-dipping rules, the HRA cannot reimburse for coverage that is paid for with pre-tax dollars.
- Provide a stand-alone HRA to reimburse on a tax-free basis for dental/vision coverage or expenses.
- Provide cash-back for waiving group health coverage offered through a cafeteria plan.
- Allow employees to elect to reduce their pay and have post-tax payroll deductions sent to the insurer. The employer must not endorse or contribute to the plan.
- Provide a QSEHRA, instead of group health plan coverage, to reimburse current employees for individual policies up to a limited allowance.
Please note that HRAs create a group health plan with other compliance implications, including COBRA, ERISA, and ACA reforms.
If you are interested in establishing an HRA or concerned whether your existing reimbursement plan is compliant, please contact your Keller team.