ACA Restricts Reimbursements of Individual Health Coverage
Author: Robert Conner
For plan years beginning after 2013, employers that provide health coverage to employees must ensure the plan conforms to the Affordable Care Act (ACA) market reform provisions, such as the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Failing to comply with these provisions could expose an employer to penalties of $100 per day per employee for as long as the arrangement continues. This issue applies to all employers providing coverage to two or more employees and is separate from the employer mandate provisions applicable to large employers.
Employer payment plans are common among smaller employers. Through these arrangements, the employer directly pays or reimburses employee substantiated premiums for nonemployer-sponsored hospital and medical insurance and excludes the premiums from the employee’s income. The IRS, Department of Labor (DOL) and Department of Health and Human Services previously have indicated employer payment plans covering two or more employees are considered group health plans that will run afoul of the market reform provisions and subject the employer to penalties. For example, IRS Notice 2013-54 provided guidance on various employer arrangements, such as health reimbursement arrangements (HRAs), group health plans under which the employer reimburses an employee for premium expenses incurred for an individual health insurance policy and certain health care flexible spending arrangements (FSAs). In addition to prohibiting employers from reimbursing employees for individual health insurance premiums on a pretax basis, some key points highlighted in the notice include:
- An HRA not integrated with other group coverage that complies with the market reform provisions, i.e., a standalone HRA, can’t be integrated with individual market coverage; therefore, an HRA used to purchase coverage on the individual market won’t comply with the annual dollar limit prohibition of the market reform provisions.
- A health care FSA that doesn’t qualify as excepted benefits, i.e., a standalone FSA, won’t meet the preventive services requirements of the market reform provisions.
In November 2014, the DOL issued an FAQ further restricting employers’ choices by stating that employer payment plans will fail the market reform provisions, without regard to whether the employer treats the money paid to the employee as pretax or post-tax.
Due to the large penalties, employers that provide insurance to their employees must ensure their plans are ACA-compliant. The following are examples of acceptable options:
- ACA-approved group health plans
- ACA-approved, high-deductible health plans that can be coupled with health savings accounts
- Group health plans acquired through the Small Business Health Options Program (SHOP) exchange – A SHOP plan can allow Internal Revenue Code Section125 salary-reduction arrangements to be set up for pretax funding of the employee portion of the premium. These plans also may qualify the employer for the small employer health insurance premium credit.
- Employer payments of individual market health insurance premiums where an employee’s premiums are paid with salary deductions on an after-tax basis, and the employer only is forwarding the employee’s premium to the insurer at the employee’s request
Presumably, an employer could provide additional (undesignated) salary to employees, which wouldn’t be considered a group health plan even if the employee used the money to purchase individual health insurance. We hope the IRS will clarify this issue soon.
Please contact your BKD advisor to discuss questions or concerns regarding how the ACA impacts your organization.