Cash Is Not King For Employers’ Reimbursement Of Individual Policy Purchases

Whether certain premium reimbursement arrangements comply with the Patient Protection and Affordable Care Act (ACA) is the topic of the most recent frequently asked questions (FAQs) regarding ACA implementation. The FAQs, which the Departments of Labor (DOL), Health and Human Services (HHS), and the Treasury (collectively, the Departments) issued jointly, prohibit employers from offering cash to employees to reimburse the purchase of an individual market policy. Employers also cannot offer employees with high claims risk a choice between enrollment in their standard group health plans or cash.

Cash reimbursement of individual policy. The FAQs state that if an employer uses an arrangement that provides cash reimbursement for the purchase of an individual market policy, the employer’s payment arrangement is part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax to the employee. Therefore, the arrangement is group health plan coverage and is subject to the ACA’s market reform provisions applicable to group health plans. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate Public Health Service Act (PHSA) Secs. 2711 (prohibition on annual limits) and 2713 (requirement to provide certain preventive services without cost sharing), among other provisions, which can trigger penalties such as excise taxes under Code Sec. 4980D.

Choice between enrollment in group health plan or cash. The FAQs also prohibit an employer from offering employees with high claims risk a choice between enrollment in its standard group health plan or cash. PHSA Sec. 2705, as well as the nondiscrimination provisions of ERISA Sec. 702 and Code Sec. 9802, prohibit discrimination based on one or more health factors. Offering, only to employees with a high claims risk, a choice between enrollment in the standard group health plan or cash, constitutes such discrimination.

Although regulations implementing these nondiscrimination provisions permit more favorable rules for eligibility or reduced premiums or contributions based on an adverse health factor (sometimes referred to as benign discrimination), such cash-or-coverage arrangements offered only to employees with a high claims risk are not permissible benign discrimination, according to the FAQs.

Accordingly, such arrangements will violate the nondiscrimination provisions, regardless of whether (1) the cash payment is treated by the employer as pre-tax or post-tax to the employee, (2) the employer is involved in the selection or purchase of any individual market product, or (3) the employee obtains any individual health insurance.

Reimbursement plans via broker or agent. Finally, the FAQs note that the Departments have been informed that some vendors are marketing products to employers claiming that employers can cancel their group policies, set up a Code Sec. 105 reimbursement plan that works with health insurance brokers or agents to help employees select individual insurance policies, and allow eligible employees to access the premium tax credits for Marketplace coverage. These arrangements are problematic because they are group health plans and, therefore, employees participating in such arrangements are ineligible for premium tax credits (or cost-sharing reductions) for Marketplace coverage. The mere fact that the employer does not get involved with an employee’s individual selection or purchase of an individual health insurance policy does not prevent the arrangement from being a group health plan. DOL guidance indicates that the existence of a group health plan is based on many facts and circumstances, including the employer’s involvement in the overall scheme and the absence of an unfettered right by the employee to receive the employer contributions in cash.

In addition, such arrangements are subject to the ACA’s market reform provisions, including PHSA Secs. 2711 and 2713. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate these PHSA sections, among other provisions, which can trigger penalties such as excise taxes under Code Sec. 4980D.

For more information, visit http://www.dol.gov/ebsa/faqs/faq-aca22.html.

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