Published Date: 01/27/2014
By Pat Rountree
The following information was contributed by Lindsey Surratt, Compliance Officer with Hill, Chesson & Woody (CAI’s employee benefits partner):
On September 13, 2013, the IRS and Treasury, along with the Department of Labor, issued new guidance that effectively prohibits employers of all sizes from reimbursing employees for the cost of individual plans on a tax preferred basis. IRS Notice 2013-54 and DOL Technical Release 2013-03 clarify that health reimbursement arrangements and employer payment plans (an arrangement under which an employer reimburses employees for substantiated individual health insurance premiums, or forward premium contributions directly to the individual insurer) cannot be integrated with individual health insurance coverage. As a result, an arrangement under which an employer pays for all or part of a person’s individual health insurance either through an HRA or an employer payment plan will not comply with healthcare reform’s preventive care requirement or the prohibition on annual and lifetime limits for essential health benefits. It also appears that this is now prohibited even if the employer subjects the reimbursement to federal and state taxation, unless the employee has the opportunity to choose between cash and after-tax amount to be applied toward health coverage.
In addition to this new guidance, there are other ERISA compliance concerns with this type of arrangement. If an employer ties the amount of reimbursement to the cost of the individual health insurance, requires the employee to use the money to purchase health insurance, or takes other actions that treat the arrangement as an employee benefit, the employer will likely inadvertently subject itself to ERISA compliance, as well as HIPAA nondiscrimination rules. If ERISA is implicated, the employer may face additional compliance requirements for the arrangement under HIPAA, COBRA, ADEA, and other federal laws.
If you missed the IRS and DOL notices and have additional questions, CAI encourages you to talk to your benefits broker or, if you do not have one, you may contact Hill, Chesson & Woody (http://www.hcwbenefits.com/).
It appears that only small employers (those with less than 50 full time or equivalent employees) would consider after-tax reimbursement of individually-purchased health insurance since under the Affordable Care Act (ACA) larger employers who do not offer company-provided coverage will have to pay a penalty (pay or play) and so would be paying twice. Also, there is no tax incentive for employers for after-tax reimbursement to employees.