Employers frequently ask us if they’re allowed to help pay for an employee’s individual health insurance policy on a pre-tax basis. This article should help shed some light on the topic and opinions within the industry.
The IRS recently issued a FAQ addressing what could happen if an employer reimburses employees for the purchase of individual health insurance premiums on a tax-favored basis (referred to as an “employer payment plan”). For this purpose, individual health insurance premiums includes individual coverage purchased either inside or outside of the Health Insurance Marketplace. The FAQ follows up on earlier guidance describing these types of arrangements (Notice 2013-54).
Employer payment plans include arrangements that reimburse some or all of an employee’s individual health insurance premiums on a tax-free basis (including reimbursement through an HRA or a direct payment by the employer to an insurance company).
Under the Affordable Care Act (ACA), an employer payment plan is considered a group health plan subject to the market reforms. These reforms prohibit annual dollar limits for essential health benefits, as well as the requirement to provide certain preventative care without cost sharing. These arrangements cannot be integrated with individual policies to satisfy the ACA’s requirements. Consequently, employer payment plans will not satisfy the market reforms under the ACA and employers offering such a program may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee).
Typically, an employer payment plan does not include an arrangement in which:
- an employee may have an after-tax amount applied toward health coverage, or
- is allowed to take that amount in cash compensation.
But some have argued that there actually is a way to reimburse an employee’s individual health plan premiums on a pre-tax basis through a health reimbursement arrangement. From the New York Times[i]:
“The issue, at least on the surface, is language in the health law meant to make sure there are no dollar limits on the coverage for a person’s basic medical needs, which the law calls essential health benefits. The IRS asserts that a plan reimbursing employees for insurance they buy on their own cannot comply with this prohibition on annual limits because the company’s contribution is by definition limited — even though the health insurance the employee ends up buying would have no annual limits.”
The argument is that since the ACA does not specifically list insurance premiums as an “essential health benefit”, reimbursing for them does not violate the law.
However, many experts and attorneys disagree and believe this approach is very risky. “In a technical guidance issued last year and reiterated in May, the Internal Revenue Service issued a clear warning about such health reimbursement arrangements, according to eight health and tax lawyers as well a half-dozen lobbyists and analysts who have followed the Affordable Care Act’s adoption. The guidance “makes it very difficult, if not impossible, for an employer to pay for an employee’s individual insurance with tax-free dollars,” said Seth Perretta, a health and tax lawyer with the Groom Law Group in Washington.i
Another issue of offering employees tax-free reimbursements for individual health insurance plans is that it could potentially disqualify employees from receiving premium tax credits in state or federal exchanges. The ACA states that employees who are offered health insurance coverage by their employers are not eligible to receive tax credits or subsidies in state or federal exchanges, even if their income is below the acceptable threshold. Since a health reimbursement arrangement (HRA) is considered a group health plan, many attorneys believe that employees who receive contributions into an HRA would be disqualified from receiving subsidies. Employees who receive a subsidy and fail to disclose the reimbursement from their employer (into the HRA) could be required to repay the subsidy at tax time.
The Treasury Department stated that the government does plan to offer additional guidance on the topic, but final determination may ultimately be decided in the courts. For now, most industry experts and attorneys agree that reimbursing an employee on a tax-free basis for their individual insurance premiums is not permitted by the law.
For the FAQ, visit: http://www.irs.gov/uac/Newsroom/Employer-Health-Care-Arrangements
For Notice 2013-54, visit: http://www.irs.gov/pub/irs-drop/n-13-54.pdf
Sean Ireland ([email protected]) is the Senior Account Relations Manager of USI Affinity’s Benefit Solutions Group. For more information about insurance, visit the Philadelphia Bar Association Insurance Exchange at www.usiaffinityex.com/PhiladelphiaBar. For Lawyers’ Professional Liability and other business coverage, you can continue to visit the regular Philadelphia Bar Association Insurance Program website at www.mybarinsurance.com/PhiladelphiaBar. If you’d like to speak with someone about insurance and benefits options for Philadelphia Bar Association members, call USI Affinity Benefit Specialists at 1-855-874-0267.
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