New DOL, IRS & HHS FAQ Confirms Employers Can’t Pay, Use HRAs to Reimburse Employees For Individual Policy Premiums


Employer and other sponsors of healthcare reimbursement arrangements (HRAs), health flexible spending arrangements (Health FSAs) or other arrangements that reimburse employees for health premiums, their fiduciaries, insurers and administrators should re-evaluate the defensibility of these arrangements in light of supplemental guidance about the treatment of these arrangements under the annual limits, preventive care without cost-sharing and other Patient Protection & Affordable Care Act (ACA) group market reform rules, in the new FAQS About Affordable Care Act Implementation (XXII) (FAQ XXII) published November 6, 2014. It

FAQ XXII confirms that employers can’t reimburse employees on a pre-tax or after-tax basis for purchasing individual coverage in lieu of group health plan coverage as promoted by various vendors and others.

Employers Can’t Reimburse Employees For Individual Premiums

Concerning employer reimbursement of employees for premiums to purchase individual coverage, FAQ XXII makes clear that the Departments object to this practice. FAQ XXII makes clear that the Departments consider ACA’s market reforms to outlaw any arrangement pursuant to which an employer provides cash reimbursement to employees for the purchase of an individual market policy, regardless of whether the reimbursement is paid on a pre- or after-tax basis. According to the FAQ XXII, the Departments view any such employer’s payment arrangement part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees regardless if the employer treats the money as pre-tax or post-tax to the employee that is group health plan coverage subject to the market reform provisions of ACA.

This position is consistent with a series of previous guidance that the Departments have published previously in which the Departments have stated, among other things, that:

  • Health reimbursement arrangements (HRAs), health flexible spending arrangements (health FSAs) and certain other employer and union health care arrangements where the employer promises to reimburse health care costs: are considered group health plans subject to the Public Health Service Act (PHS Act) § 2711 annual limits, PHS Act § 2713 preventive care with no cost-sharing and other group market reform provisions of PHS Act §§ 2711-2719 and incorporated by reference into the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code);
  • HRA or other premium reimbursement arrangements do not violate these market reform provisions when integrated with a group health plan that complies with such provisions. However, an employer health care arrangement cannot be integrated with individual market policies to satisfy the market reforms. Consequently, such an arrangement may be subject to penalties, including excise taxes under section 4980D of the Internal Revenue Code (Code).

See, DOL Technical Release 2013-03; IRS Notice 2013-54; Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare Arrangement; IRS May 13, 2014 FAQs available here.

FAQ XXII reaffirms and reinforces this prior guidance, stating “Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code. Under the Departments’ prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy.” See, DOL Technical Release 2013-03; IRS Notice 2013-54; Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare Arrangements, September 16, 2013.

Code § 105 Reimbursement Plan Can’t Pay For Individual Policies

FAQ XXII also confirms the Departments’ view that arrangements where 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 employees select individual insurance policies, and allow eligible employees to access the premium tax credits or other HRA dollars to pay for Marketplace coverage are illegal.

According to FAQ XXII, these arrangements are problematic for several reasons including the following:

The arrangements themselves group health plans. 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.12

Under DOL Technical Release 2013-03, IRS Notice 2013-54, and the two IRS FAQs addressing employer health care arrangements, such arrangements are subject to the market reform provisions of the Affordable Care Act, including the PHS Act § 2711 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 to satisfy the market reforms and, therefore, will violate PHS Act §§ 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under Code § 4980D.

ACA & HIPAA Prohibit Employers From Offering Only High Risk Employees Cash In Lieu of Health Coverage

FAQ XXII also confirms the Department’s position that an employer violates the ACA provisions of PHS Act § 2705, ERISA § 715 and Code § 9815, as well as the Health Insurance Portability & Accountability Act (HIPAA) nondiscrimination provisions of ERISA section 702 and Code § 9802 prohibiting discrimination based on one or more health factors if it offers selectively only to employees with high claims risk a choice between enrollment in its standard group health plan or cash. FAQ XXII clarifies that while the Departments’ regulations allow more favorable rules for eligibility or reduced premiums or contributions based n an adverse health factor (sometimes referred to as benign discrimination), in the Departments’ view, this position does not extend to cash-or-coverage arrangements offered only to employees with a high claims risk. Accordingly, FAQ XXII states 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.

Beyond these concerns stated in FAQ XXII, employers and others contemplating offering such a choice also should discuss potential exposures under the Americans With Disabilities Act (ADA) and, depending on the nature of the condition, Medicare law.

In light of this new guidance and previous guidance published by the Departments, employers and others sponsoring or contemplating engaging in these arrangements are encouraged to contact competent counsel for assistance in understanding the potential concerns raised by involvement in these practices and their resolution.

About Author Cynthia Marcotte Stamer

If you need help evaluating or monitoring the implications of these developments or reviewing or updating your health benefit program for compliance or with any other employment, employee benefit, compensation or internal controls matter, please contact the author of this article, attorney Cynthia Marcotte Stamer.

A Fellow in the American College of Employee Benefits Council, immediate past-Chair and current Welfare Benefit Committee Co-Chair of the American Bar Association (ABA) RPPT Employee Benefits & Other Compensation Arrangements, an ABA Joint Committee on Employee Benefits Council Representative, the ABA TIPS Employee Benefit Plan Committee Vice Chair, former ABA Health Law Section Managed Care & Insurance Interest Group Chair, past Southwest Benefits Association Board Member, Employee Benefit News Editorial Advisory Board Member, and a widely published speaker and author,  Ms. Stamer has more than 24 years experience advising businesses, plans, fiduciaries, insurers. plan administrators and other services providers,  and governments on health care, retirement, employment, insurance, and tax program design, administration, defense and policy.   Nationally and internationally known for her creative and highly pragmatic knowledge and work on health benefit and insurance programs, Ms. Stamer’s  experience includes extensive involvement in advising and representing these and other clients on ACA and other health care legislation, regulation, enforcement and administration.

Widely published on health benefit and other related matters, Ms. Stamer’s insights and articles have been published by the HealthLeaders, Modern Health Care, Managed Care Executive, the Bureau of National Affairs, Aspen Publishers, Business Insurance, Employee Benefit News, the Wall Street Journal, the American Bar Association, Aspen Publishers, World At Work, Spencer Publications, SHRM, the International Foundation, Solutions Law Press and many others.

For additional information about Ms. Stamer and her experience, see www.CynthiaStamer.com.

For Added Information and Other Resources

If you found this update of interest, you also may be interested in reviewing some of the other updates and publications authored by Ms. Stamer available including:

For Help Or More Information

If you need assistance in auditing or assessing, updating or defending your organization’s compliance, risk manage or other  internal controls practices or actions, please contact the author of this update, attorney Cynthia Marcotte Stamer here or at (469)767-8872.

Board Certified in Labor & Employment Law by the Texas Board of Legal Specialization, management attorney and consultant Ms. Stamer is nationally and internationally recognized for more than 24 years of work helping employers and other management; employee benefit plans and their sponsors, administrators, fiduciaries; employee leasing, recruiting, staffing and other professional employment organizations; and others design, administer and defend innovative workforce, compensation, employee benefit  and management policies and practices. Her experience includes extensive work helping employers implement, audit, manage and defend union-management relations, wage and hour, discrimination and other labor and employment laws, privacy and data security, internal investigation and discipline and other workforce and internal controls policies, procedures and actions.  The Chair of the American Bar Association (ABA) RPTE Employee Benefits & Other Compensation Committee, a Council Representative on the ABA Joint Committee on Employee Benefits, Government Affairs Committee Legislative Chair for the Dallas Human Resources Management Association, and past Chair of the ABA Health Law Section Managed Care & Insurance Interest Group, Ms. Stamer works, publishes and speaks extensively on management, reengineering, investigations, human resources and workforce, employee benefits, compensation, internal controls and risk management, federal sentencing guideline and other enforcement resolution actions, and related matters.  She also is recognized for her publications, industry leadership, workshops and presentations on these and other human resources concerns and regularly speaks and conducts training on these matters.Her insights on these and other matters appear in the Bureau of National Affairs, Spencer Publications, the Wall Street Journal, the Dallas Business Journal, the Houston Business Journal, and many other national and local publications. For additional information about Ms. Stamer and her experience or to access other publications by Ms. Stamer see hereor contact Ms. Stamer directly.

About Solutions Law Press

Solutions Law Press™ provides business risk management, legal compliance, management effectiveness and other resources, training and education on human resources, employee benefits, data security and privacy, insurance, health care and other key compliance, risk management, internal controls and operational concerns. If you find this of interest, you also be interested reviewing some of our other Solutions Law Press resources at www.solutionslawpress.com.

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©2014 Cynthia Marcotte Stamer.  Non-exclusive right to republish granted to Solutions Law Press.  All other rights reserved.

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