Employee Benefits Q&A: Can Employers Just Give Employees Money to Purchase Their Own Health Insurance?

While it’s unlikely that employee benefits law will ever form the basis of an edge-of-your-seat Hollywood thriller—ERISA Extreme, anyone?—the past few weeks are about as close as we will ever get.

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The ongoing, and ever-changing, saga over the fate of the Affordable Care Act (ACA) has certainly kept benefits nerds, like me, glued to the news.

Despite all the high-stakes uncertainty, there are a few constants for employers. One of these, alas, is recordkeeping—no matter what the future holds for the ACA, you will still be doing more healthcare-related reporting to the IRS than you’d probably like.

Another constant is confusion. As we have been getting many versions of the same question from subscribers lately, I thought it was worth some discussion:

Can we give employees money to put towards the purchase of their own healthcare insurance?

This is a very good question, put forth by smart employers undoubtedly looking to cut through some of the healthcare clutter. Unfortunately, as with many benefits-related questions, there are limits to how much autonomy employers have in this area.

An employer is always free to pay employees a higher wage, when these wages simply serve as additional taxable income and are available to the employees to use at their discretion—perhaps to purchase health insurance or perhaps not.

In other words, the employees would be entitled to these wages regardless of whether they actually use them to purchase health insurance in the individual marketplace. Essentially, the employees would be receiving a benefits offset in the form of additional wage income.

However, if the employer is hoping to structure a more complex sort of “health reimbursement plan/stipend” under which the employees would receive additional, tax-free compensation provided that the employees use those funds to purchase health insurance in the individual market, then this type of plan can run into problems.

The primary issue with these plans is whether they adhere to the market reforms contained within the ACA—specifically, the annual dollar limit prohibition and the preventive services requirements.

In 2013, the Internal Revenue Service, U.S. Department of Labor, and U.S. Department of Health and Human Services collaborated on a Technical Release that significantly limited the use of premium reimbursement plans such as stand-alone health reimbursement arrangements (HRAs). Within this technical release are detailed circumstances under which an HRA will be considered to be “integrated” with another group health plan and will meet the market reforms set forth by the ACA.

The market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year. They also do not apply to a group health plan in relation to its provision of “excepted benefits”—which include, among other things, accident-only coverage, disability income, certain limited-scope dental and vision benefits, certain long-term care benefits, and certain health flexible spending accounts.

The market reforms do, however, apply to most other health plans—including those offered by employers with fewer than 50 full-time employees or full-time equivalents (i.e., employers that are not subject to the ACA’s play-or-pay penalties).

As noted above, because the final scope—and timeline—of the ACA repeal/replace efforts is far from certain, employers must maintain the status quo for now.

Therefore, if you want to give employees additional income that must specifically be used for health benefits, we highly discourage the idea of simply winging it and cutting a check. Instead, you should consult with experienced benefits counsel and your benefits plan administrator in order to ensure that the stipend is properly integrated with a related group health plan.

In the meantime, stay tuned for all the latest developments in the continuing saga of the ACA.