For years, employers have had the option of funding their employees’ health insurance premiums – including individual health insurance premiums – through an HRA, an IRC Section 125 cafeteria plan, or some other sort of tax-free employer payment plan. These employer contributions are excluded from the employees’ taxable income.
Health Partners America actually got its start training agents and brokers to set up this sort of funding arrangement. Since most employers would like to contribute something to their employees’ health insurance but many small employers were unable to meet the carrier’s participation and contribution requirements, providing the employee with some funds – even $100 per month – through a tax-advantaged account and letting the employees use it to reimburse themselves for the cost of individual health insurance seemed like a great strategy, and it worked really well for a lot of employers.
The problem, though, was that these funding arrangements were usually considered employer-sponsored health plans, making them subject to the small group guaranteed issue rules under HIPAA and making them subject to a number of small group mandated benefits, which of course vary by state. Since most states do not have the same requirements in the individual market, this presented a problem for employers.
When the health reform legislation was passed, we learned that, beginning in 2014, individual plans would now be guaranteed issue in all states and would cover the same “essential benefits” as small group plans, seemingly eliminating all the roadblocks and giving employers in all states the green light to fund individual plans through a health reimbursement arrangement (HRA) or premium reimbursement account (PRA).
ACA Section 1515
One problem, though, was Section 1515 of the Affordable Care Act. What it says is that an IRC Section 125 Cafeteria Plan cannot be used for individual plans purchased through a federal or state exchange, whether or not an individual is receiving a premium tax credit. What this meant was that Premium Reimbursement Arrangements were still legal, but only for non-subsidized plans purchased outside of the individual marketplace.
IRS, HHS, and DOL FAQs
On January 24th, 2013, advocates of the defined contribution strategy finally received some long-awaited guidance in the form of an FAQ piece jointly provided by the Departments of Treasury, Health & Human Services, and Labor. The FAQ piece seemed to say that, beginning in 2014, HRAs cannot be used to fund individual health insurance premiums in or out of the individual marketplace because they are subject to PHS Section 2711, which was modified by the Affordable Care Act to say that plans cannot place annual or lifetime maximums on essential benefits. Since an HRA by definition is limited to the employer’s contribution and because HRAs cannot be integrated with coverage purchased in the individual market that satisfies the annual limit requirements, a stand-alone HRA that is not integrated with qualified group health coverage would be out of compliance.
Not everyone read the FAQs the same way, so we eagerly awaited the future guidance that we were promised in the FAQs. We received that guidance on Friday, September 13th.
DOL Technical Release
In Technical Release No. 2013-03, the Department of Labor provided answers to a number of outstanding questions about HRAs and other employer funding vehicles. The release notes that the big 3 government agencies had worked together to develop the guidance and that the “guidance in this Technical Release is being issued in substantially identical form by the Treasury Department, and guidance is being issued by HHS to reflect that HHS concurs in the application of the laws under its jurisdiction as set forth in this Technical Release.”
This is important because, in the past, we’ve received mixed signals about the legality of this strategy – like a mom telling her teenage son he can borrow the car but dad saying no. In this instance, the DOL, Treasury, and HHS are all on the same page. Unfortunately, this guidance seems to kill the strategy of reimbursing individual premiums tax-free with employer dollars.
Here are the highlights of the DOL technical release:
- Group health plans are subject to the market reforms detailed in Sections 2711 and 2713 of the Public Health Service Act. They may not impose any annual limit on the dollar amount of essential benefits and must provide certain preventive services without any cost-sharing requirements.
- Coverage provided through Section 125 plans, employer payment plans, health FSAs, and HRAs are eligible employer-sponsored group health plans. This means that they are subject to these market reforms, which is a problem since, by design, they do have an annual limit (the employer contribution amount) and do not provide preventive services without cost-sharing in all instances.
- Furthermore, while these plans can be integrated with other employer-sponsored group health plans that satisfy the market requirements and be considered compliant, they cannot be integrated with individual health plans. Therefore, using employer money for individual premiums would fail to satisfy the market reforms.
- Finally, because these tax-free employer contributions are considered employer-sponsored plans, they’re also considered minimum essential coverage unless the coverage consists solely of excepted benefits. This means that, even if they did somehow satisfy the market reform requirements, participating in one of these plans would make an employee ineligible for a premium tax credit in the individual marketplace.
There continues to be some debate about what the recent guidance means, but not much. While there are some administrators that claim the Technical Release is “good news” that finally confirms employers can help employees pay for individual premiums on a tax-free basis, most attorneys, administrators, and brokers are interpreting the guidance to say that this strategy will not be permitted. At Health Partners America, we would advise against this funding strategy unless we receive some information to the contrary from the regulatory agencies.
The Silver Lining
The good news is that this isn’t the end of the world. Most employers will continue to make decisions about offering or dropping their group health coverage whether or not they can pay for their employees’ individual health plans, and an HPA private exchange can help brokers provide a solution for these employers. We also have a few ideas about how employers can still provide valuable employee benefits while dropping their group health coverage – there’s more than one way to skin a cat.
Be on the lookout for a new white paper we’ll be releasing in the next few days called Defined Contribution: What’s legal, what’s not? It will provide more information about why the defined contribution strategy isn’t completely dead and why many employers should still consider dropping their group health coverage.