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Compliance Briefing Center

Legislation and Reform

Making it Easier for You
to Manage Benefits

Three New Facts about Individual Insurance Reform

The Department of Labor (DOL) released “FAQs about Affordable Care Act Implementation (Part XXII)" on November 6, 2014. These three new FAQs, prepared jointly by the DOL, Health and Human Services (HHS) and the Treasury (the Departments), restate compliance information about premium reimbursement arrangements that pay individual insurance policies premiums with pre-tax dollars.

We first reported about the inability of employers to reimburse employees or pay individual insurance policy premiums with pre-tax dollars in October 2013 when we issued two Compliance Alerts on Health Reimbursement Arrangements (HRAs) and Flexible Spending Accounts (FSAs) that took effect January 1, 2014.

Now, due to some vendors who have continued marketing products with recommendations that employers can still pay individual insurance premiums with pre-tax dollars or through an employer’s payment arrangement, the Departments have again shut the door on any supposed loopholes.

Q1. My employer offers employees cash to reimburse the purchase of an individual market policy. Does this arrangement comply with the market reforms?

A1. No. Employers may not use arrangements that provide cash reimbursement for the purchase of individual market policies. Such an employer plan is part of a plan, fund or other arrangement established or maintained for the purpose of providing medical care to employees, regardless of whether the employer treats the money as pre-tax or post-tax to employees.

Such employer health care arrangements cannot be integrated with individual market policies and will violate PHS Act sections 2711 and 2713, among other provisions. The Departments already established that cash arrangements fail to comply with market reform and cannot be integrated with individual policies.

Q2. My employer offers employees with high claims risk a choice between enrollment in its standard group health plan or cash. Does this comply with the market reforms?

A2. No. PHS Act section 2705 prohibits discrimination based on one or more health factors. In the Departments’ view, cash-or-coverage arrangements offered only to employees with high claims risk are not permissible benign discrimination. Benign discrimination does not favor highly-compensated employees. For instance, reducing the health insurance plan deductible for those who attend classes and follow through with recommended diet and exercise programs for specified diseases would be discrimination in a benign manner.

Because of the choice between taxable cash and tax-favored qualified benefits, it is required to be a Code section 125 cafeteria plan. This imposes additional nondiscrimination testing. Depending on the facts and circumstances, this could also result in discrimination in favor of highly compensated individuals in violation of the Code section 125 cafeteria nondiscrimination rules.

Q3. A vendor markets a product to employers claiming that employers can cancel their group policies, set up a Code section 105 reimbursement plan that works with health insurance brokers or agents to help employee select individual insurance policies and allow eligible employees to access the premium tax credits for Marketplace coverage. Is this permissible?

A3. No. The Departments have been informed that some vendors are marketing such products. However, these arrangements are problematic. The arrangement described above is a group health plan and, therefore, employees participating in such arrangements are ineligible for premium tax credits (or cost-sharing reductions) for Marketplace coverage.

Second, as explained in DOL Technical Release 2013-03, IRS Notice 2013-54 and the two IRS FAQs, such arrangements are subject to the market reform provisions of the Affordable Care Act (ACA). This includes a prohibition on annual limits and the PHS Act 2713 requirement to provide certain preventive services without cost sharing. Such employer health care arrangements cannot be integrated with individual market policies.

PHSA mandates carry a high price for noncompliance. An excise tax of $100 per day for each individual to whom such failure relates (which is $36,500 per year, per employee) can be assessed under section 4980D and subsequently reported on Form 8928.

If you have additional questions or have an arrangement described above that does not meet all IRS requirements for an employer plan, please contact your Relationship Manager for further guidance.

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