Private Exchanges: Employer Health Program Panacea or Problem? Consider Carefully!

November 20, 2014

Employers trying to continue offering affordable health and welfare benefits amid the expanding costs and regulations enacted under the Patient Protection & Affordable Care Act (ACA) often are encouraged by some consultants and brokers to consider offering  coverage options pursuant to a “private exchange” offering employees the options to get reimbursement for individual health coverage from a health reimbursement account (HRA) (collectively the “agencies”) or other choice optand cions.

While these options sound attractive, not all of these options work for all employers. The consumer driven health care and other private exchange lingo used to describe these arrangements often means different things to different people.  Some “private exchanges” are little more than high-tech online cafeteria enrollment arrangements. See, e.g. A ‘Cynical’ Look at Private Exchanges Employers need to carefully scrutinize these proposals both for their compliance and other legal risks, affordability and cost, and other suitability.

When considering a private exchange or other arrangement, it is important to understand clearly the proposal, its design, operation, participating vendors, the charges, what is excluded or costs extra, and who is responsible for delivering what.  Assuming an employer views the cost and operations merit considering the option, it also needs to carefully evaluate the legal compliance and risks of the arrangements.

The agencies have issued a long stream of guidance cautioning employers about the use of arrangements where the employer provides pre- or after-tax dollars to pay for or reimburse premiums for individual policies, and employers from paying or reimbursing employees for the cost of enrolling in coverage under a public health insurance exchange or both.  See, e.g., 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.  Most recently, for instance, the new FAQS About Affordable Care Act Implementation (XXII) (FAQ XXII) published by the agencies on November 6, 2014 reiterates previous agency guidance indicating that tax basis for purchasing individual coverage in lieu of group health plan coverage.  FAQ XXII, among other things, states

  • 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) but
  • 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).

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.”

Another potential arises under the various tax and non-discrimination rules of the Code and other federal laws.  For instance, Code sections 105, 125 and other Code provisions prohibitions against discrimination in favor of highly compensated or key employees could arise based on the availability of options or enrollment participation.  Historically many have assumed that these concerns could be managed by treating the premiums or value of discriminatory coverage as provided after-tax for highly compensated or key employees.  However IRS and Treasury leaders over the past year have made statements in various public meetings suggesting that the IRS does not view this as a solution.  Of course, FAQ XXII also highlights the potential risks of underwriting or other practices of offering individual or other coverage in a manner that discriminates against disabled, elderly or other employees protected against federal employment discrimination, Medicare, Medicaid, veterans or other federal employment or related laws.

In addition to confirming that the arrangement itself doesn’t violate specific Code or other requirements, employers and others responsible for structuring these arrangements also should exercise care to critically evaluate and document their analysis that the options offered are suitable.  Like other employee benefit arrangements, ERISA generally requires that individual or group products offered by employers, unions or both be prudently selected and managed. Employers sponsoring or considering sponsoring these arrangements should expect that the DOL will expect that each product or benefit option offered be prudently selected in accordance with ERISA’s rules.  Compensation arrangements for the brokers and consultants offering these arrangements also should be reviewed for prudence, as well as to ensure that the arrangements don’t violate ERISA’s prohibited transaction rules.  Eligibility and other enrollment and related administrative systems and information sharing also should be critically evaluated under ERISA, as well as to manage exposures under the privacy and security rules of the Health Insurance & Portability Act (HIPAA) and other laws.

As a part of this analysis, employers and others contemplating involvement in these arrangements also will want to critically review the vendor contracts and operating systems of the vendors that will participate in the program both for legal compliance, prudence for inclusion, prohibited transactions, and other legal compliance, as well as to ensure that the contract by its terms holds the vendor responsible for delivering on service and other expectations created in the sales pitch.  In reviewing the contract, special attention should be given to fiduciary allocations, indemnification and standards of performance, business associate or other privacy and data security assurances required to comply with HIPAA and other confidentiality and data security requirements and the like.  As HHS discovered with the rollout of the exchange, unctionality also plays a big role in the value proposition justified, the contractual commitments from the vendor also should cover expected operational performance and reliability as well as legal compliance and risk management.

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

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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, re-engineering, 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 get access to other publications by Ms. Stamer see hereor contact Ms. Stamer directly.

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