In three new frequently asked question (FAQs), the agencies responsible for implementing the health reform law continued their efforts to stamp out reimbursement of employees’ individual health insurance premiums. They also condemned paying incentives for individuals with high claims costs to obtain coverage elsewhere.
In the FAQs, the agencies stressed that employers who pay or reimburse premiums for individual health insurance coverage will violate health reform law requirements, even if the amounts are treated as taxable compensation. The agencies then explained that an employer violates various laws by paying individuals with high claims to waive coverage under the employer’s health plan. Finally, the agencies explained that schemes for reimbursing individual health insurance premiums are group health plans that must comply with health reform law mandates even if the employer has no involvement in choosing the health coverage.
One of the promises of the health reform law was greater availability of individual health insurance coverage. And employers, looking to simplify and reduce costs for health benefits, have considered replacing employer-sponsored health plans with tax-favored payments to help employees obtain individual coverage (through the public health insurance exchanges, or Marketplaces, or elsewhere). There are significant questions, however, about the legality and consequence of such assistance, including whether it would:
- Prevent the employer from incurring penalties under the employer play or pay mandate.
- Prevent employees from qualifying for premium tax credits (subsidies) for Marketplace coverage.
- Be subject to the health reform law’s benefit mandates.
The health reform law itself prohibits employers from allowing employees to use pre-tax amounts to pay for individual Marketplace coverage, and available guidance was never encouraging. Then, in September 2013, the agencies issued guidance on the status of various health reimbursement programs under the health reform law (see our Alert). In the 2013 guidance, the agencies condemned what they called “employer payment programs” (or EPPs) under which employers pay or reimburse the cost of individual insurance policies. The agencies explained that, unless an exception applies, EPPs are group health plans and are required to comply with the health reform law’s prohibition of annual and lifetime dollar limits on essential health benefits and the requirement to cover preventive services without cost sharing. Such programs, by their very nature, violate these mandates.
Lockton Comment: In FAQs issued last May, the Internal Revenue Service (IRS) explained that failing to comply with the health reform law’s benefit mandates may result in a $100/day excise tax per affected individual (which is $36,500 per year, per individual). Other penalties and liabilities may apply, as well.
EPPs Include Taxable Reimbursements of Individual Coverage
In the 2013 guidance, the agencies noted that EPPs do not include arrangements under which an employee may have an after-tax amount applied toward health coverage or take that amount in cash compensation. This led to speculation that payments or reimbursements are permitted (and do not violate the health reform law mandates) if they are treated as taxable compensation. In the new FAQs, the agencies quashed that notion.
They explained that the previous guidance allowed for arrangements in which the employee would receive the taxable amount in cash if the benefits are not elected. Any arrangement that conditions availability of a taxable (or nontaxable) amount on an employee obtaining health coverage qualifies as an EPP. As such, it must comply (but cannot comply) with the dollar limits and preventive care mandates noted earlier.
Lockton comment: EPPs escape these mandates if they qualify as exempt retiree- only plans or excepted benefits (e.g., because they reimburse only dental and vision premium expenses). Even though a retiree-only EPP will not result in non-compliance with the benefit mandates, a retiree who has EPP coverage is considered to have minimum essential coverage and cannot qualify for premium assistance for Marketplace coverage.
One Step Further: Paying High Claims Risk Employees to Waive Coverage
Employers who have high-cost claimants in their plans know how drastically such individuals can affect the cost of providing coverage. Rather than eliminating coverage for all employees, some employers in this situation have considered paying high-cost claimants relatively large amounts if they will waive coverage under the employer’s plan. As explained above, the employer could not explicitly pay for Marketplace or other coverage or make the payment contingent on obtaining other coverage. Nonetheless, the assumption underlying such a proposal is that the employee would obtain Marketplace or other individual coverage in place of the employer’s plan.
Lockton comment: Under recent IRS guidance regarding changes to pre-tax elections, employers have greater leeway than they did previously to allow mid-year transfers to Marketplace coverage. An employer could, for example, allow an employee with premature triplets to drop employer coverage and move to Marketplace coverage coincident with the birth of the children. See our Alert.
Although the health reform law does not contain an anti-dumping rule with respect to Marketplace coverage, the agencies explained in the new FAQs that offering disenrollment incentives to only to high-cost claimants constitutes discrimination based on a health status factor, which is a HIPAA violation. Very generally, HIPAA’s nondiscrimination provisions prohibit conditioning or varying health coverage eligibility or contributions based on an individual’s health status. According to the agencies, an individual who is offered a payment to opt out of an employer plan is being required to pay more for health coverage than other similarly situated participants based on a health status factor, which violates HIPAA.
In a fine piece of lawyerly reasoning, the agencies noted that an individual being offered the disenrollment incentive must forego that payment to remain in the plan, and therefore the individual’s cost for coverage includes both the regular contributions and the foregone payments. Because the offer is made only to the high-cost claimant, the agencies conclude that the individual’s required contribution is greater than the contribution required of a similarly situated individual enrolled in the plan, which violates HIPAA’s nondiscrimination provisions. The agencies also noted that they would revise the HIPAA nondiscrimination regulations to make clear that opt-out incentives offered only to high-cost claimants are not considered to be “benign” discrimination in favor of those with adverse health conditions (a form of health status discrimination that is permitted).
If It Sounds Too Good to Be True…
Much like locusts, vendors appear every few years claiming they can save employers huge amounts of cash by implementing a Section 105 plan. In the past, these were “double- dipping” arrangements that were sold as allowing tax-free reimbursement of employees’ pre- tax payments for health coverage. Needless to say, the IRS condemned these arrangements.
The Marketplaces and premium tax credits have inspired vendors to offer a new variation on the Section 105 plan. Employees obtain individual coverage, perhaps from the Marketplace and perhaps with a premium tax credit, they then present their premium receipts to the employer and are reimbursed on a tax-free basis for the premium. The vendors apparently assure the employer that the reimbursement is not a group health plan that must comply with the health reform law mandates because the employer has no role in choosing the employees’ coverage.
In the new FAQs, the agencies explained that the premium reimbursement itself is a group health plan, so the employer’s lack of involvement with the employee’s choice of individual health coverage is irrelevant. The agencies concluded that the absence of an unfettered right to receive the reimbursement amount in cash results in the reimbursement program being a group health plan. Like the EPPs described above, therefore, the arrangement is subject to, but cannot comply with, the dollar limits and preventive care benefit mandates. In addition, the reimbursement program qualifies as minimum essential coverage, so an employee participating in it could not qualify for premium assistance with respect to Marketplace coverage.
These new FAQs provided no surprises, given the agencies’ previous pronouncements on EPPs. For employers that wish to support employees’ purchase of individual coverage, it appears that the only option is providing additional taxable pay that is available regardless of whether the employee obtains coverage. In addition, the payment may not be made on a selective basis to those having adverse health status factors.