November 13, 2014
On November 6, 2014, the Departments of Labor (DOL), Health and Human Services (HHS) and the Treasury (collectively, the Departments) issued additional guidance in the form of Frequently Asked Questions (FAQs) to assist in the implementation of the Affordable Care Act (ACA).
These FAQs address the appropriateness (or rather, inappropriateness) of certain employer practices involving premium reimbursement or other similar cash arrangements to purchase individual insurance policies.
The Departments' guidance specifically addressed three issues associated with premium reimbursement arrangements. This follows previous related guidance clarifying that a stand-alone health reimbursement arrangement (HRA) and other employer health care payment arrangements are group health plans subject to the ACA's market reform provisions, including the prohibition on annual limits and the requirement to provide preventive services without cost sharing. In each of these issues, the Departments indicated that the arrangement would violate the ACA, and thus would not be permitted.
Cash Reimbursements to Purchase Coverage in the Individual Market
This guidance essentially prohibits all employer arrangements that reimburse employees for individual premiums, whether or not employers treat the money as pre-tax or post-tax for employees and clarifying that because these arrangements do not comply with the ACA's market reforms, they may subject employers to penalties.
According to the new FAQs, an employer arrangement that provides cash reimbursement for an individual market policy is considered to be part of a plan, fund or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax for the employee. Therefore, the arrangement is group health plan coverage subject to the ACA's market reform provisions. The Departments stressed that these employer health care arrangements cannot be integrated with individual market policies to satisfy the ACA's market reforms. As a result, these plans will violate the ACA's market reforms, which can trigger penalties, including excise taxes under Code Section 4980D (Prior to the issuance of the FAQs, it had been widely believed that these penalties would apply only to pre-tax arrangements).
Employees with High Claims Risk
The FAQs also clarify that an employer cannot offer a choice between enrollment in the standard group health plan or cash (or other coverage incentive) only to employees with a high claims risk. This practice constitutes unlawful discrimination based on one or more health factors, in violation of federal nondiscrimination laws.
Although employers are permitted to have more favorable rules for eligibility or reduced premiums or contributions based on an adverse health factor to encourage participation (sometimes referred to as benign discrimination), the Departments assert that offering cash-or-coverage arrangements only to employees with a high claims risk is not permissible benign discrimination and would serve to discourage participation in a group health plan. Accordingly, these arrangements will violate the nondiscrimination provisions, regardless of whether:
The Departments also noted that the choice between taxable cash and a tax-favored qualified benefit (the election of coverage under the group health plan) is required to be a Code Section 125 cafeteria plan. Offering this choice to high-risk employees could result in discrimination in favor of highly compensated individuals, in violation of the cafeteria plan nondiscrimination rules.
Code Section 105 Reimbursement Plans
The Departments also noted that certain vendors are marketing products to employers claiming that, instead of providing a group health insurance plan, employers can establish a Code Section 105 reimbursement plan that works with health insurance brokers or agents to help employees select individual insurance policies, allowing eligible employees to obtain subsidies for Marketplace coverage.
The FAQs assert that these arrangements are problematic for several reasons. First, these arrangements are, themselves, group health plans. Therefore, employees participating in the arrangements are ineligible for Marketplace subsidies. The mere fact that the employer is not involved with an employee's individual selection or purchase of an individual health insurance policy does not prevent the arrangement from being a group health plan.
Second, as explained in previous guidance, these arrangements are subject to the ACA's market reform provisions, including the annual limit prohibition and preventive care coverage requirement. As noted before, these employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, can trigger penalties, including excise taxes under Code Section 4980D.
The Departments' guidance is available at http://www.dol.gov/ebsa/faqs/faq-aca22.html.
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