Employers cannot simply give employees extra money to buy individual health insurance — whether through health reimbursement arrangements, health flexible spending arrangements or just plain cash — and expect to avoid “shared responsibility” penalties, the IRS with the U.S. Departments of Labor and Health and Human Services said in new frequently asked questions about the Affordable Care Act.
FAQs Part XXII explains why employers should exercise caution when considering premium reimbursement arrangements in lieu of group health plan coverage, because they won’t be seen as satisfying the employer mandate to offer substantial medical coverage.
Reimbursement for Premiums Won’t Satisfy the Employer Mandate
Even if the employer pays fully for the premiums to purchase individual coverage, the first FAQ in Part XXII makes it clear that the practice would not satisfy the employer mandate, regardless of whether the employer treats the money as pre-tax or post-tax. Since employer money cannot integrate with individual-market policies under the ACA, the agencies said they could trigger expensive penalties for (for example) putting a cap on the dollar value of benefits.
Offering Cash to High-risk Employees Considered Discriminatory
It would also violate the market reforms to offer only high-risk employees cash instead of health coverage, according to the second FAQ, because that would constitute discrimination “based on one or more health factors” under the ACA and HIPAA. Such an arrangement would be prohibited regardless of whether: (1) the cash payment is pre-tax or post-tax; (2) the employer is involved in the selection or purchase of the individual market policy; or (3) the employee obtains any individual health insurance.
HIPAA’s nondiscrimination provisions (see ERISA Section 702 and Code Section 9802) prohibit discrimination in eligibility or benefits based on a health factor.
The nondiscrimination rules do allow some “benign discrimination,” such as offering enhanced coverage to an at-risk employee with a history of high-cost claims, but the departments do not consider it benign to offer cash to employees with high claims risks as an incentive to disenroll from standard group health plan coverage. Instead, any arrangement that ushers such an employee out of a plan because of his or her high-cost history or reputation, will be seen to violate HIPAA and expose the plan to ACA penalties.
Such offers fail to qualify as benign discrimination, the departments explained, because:
- the high-claims-risk employee must accept the cost of forgoing the cash in order to elect plan coverage, meaning he or she must pay more to participate than other employees; and
- the benign discrimination rules apply only to plan provisions that help unhealthy employees participate, not those that discourage participation.
Cafeteria Plans Alone Don’t Satisfy the Mandate
The last FAQ reminded employers that it will not satisfy the employer mandate to: (1) cancel a group policy; (2) set up a Code Section 105 reimbursement plan (like an HSA or an HRA); and then (3) use a broker to help employees select individual insurance policies and tax subsidies.
First of all, HSAs, HRAs and health FSAs are considered group health plans under the ACA, and as such they render participating employees ineligible to get subsidies for exchange purchases, the FAQ states. Second, as health plans, they are subject to ACA market reform provisions, including no annual limits on benefits. As such they fail the employer mandate tests if they are standalone programs.
The mere fact that the employer doesn’t get involved with the individual’s selection of an outside policy doesn’t change the fact that the arrangement is a group health plan. So, stand-alone cafeteria plans for payment of individual policies would expose the employer to shared responsibility payments.
On the other hand, HSAs, HRAs and health FSAs are allowed to help comply with the employer mandate if they are integrated with the employer’s own minimum essential health coverage.
For more information, see DOL Technical Release 2013-03, and IRS Notice 2013-54. See also this Insurance Standards Bulletin from September 2013.
Note: Violating the prohibition on annual limits and the requirement to provide preventive services without cost sharing can expose the plan sponsor to excise taxes under Section 4980D of the tax Code, which carry penalties that are even more expensive than the pay-or-play mandate’s “no-coverage” and “inadequate-coverage” penalties.