Question: We’re considering the idea of forgoing a formal health care insurance plan at our company. Instead, we’d like to direct our employees to a health care exchange (now called “a Health Insurance Marketplace”) and then reimburse them for the premiums paid there. Can we do this and still be in compliance with the Affordable Care Act (ACA)?
Answer: No, the approach you describe is not permissible under the ACA. In fact, just this past May, the IRS issued pointed guidance reiterating a conclusion it first disclosed in Notice 2013-54.
That is, if an employer reimburses employees’ premiums for individual health insurance policies, the employer will be considered to have established a type of group health plan called an “employer payment plan.” And because employer payment plans cannot integrate with individual insurance policies, they violate the ACA’s prohibition on annual dollar limits for essential health benefits and the requirement to cover certain preventive services without cost-sharing.
Although it doesn’t say so explicitly, the May guidance seems to have pretax arrangements in mind, because it notes that allowing an employee to choose between applying an after-tax amount toward health care coverage or receiving that amount as cash compensation would generally not be considered an employer payment plan.
In any case, in describing the consequences of the violation, the agency emphatically notes that an employer could be exposed to excise taxes of $36,500 per year (in other words, $100 per day) for each employee affected by the failures. This excise tax liability requires self-reporting on IRS Form 8928.
Adverse consequences are also possible under the Employee Retirement Income Security Act and the Public Health Service Act. As the IRS noted, the Department of Labor (DOL) issued substantially identical guidance in Technical Release 2013-03, and the Department of Health and Human Services (HHS) is expected to announce soon that it concurs.
Notice 2013-54 staked out the IRS position that employer payment plans don’t comply with the ACA because they typically don’t provide first-dollar coverage for preventive services and are deemed to impose annual dollar limits up to the cost of the individual coverage bought through them. But, above all, employer payment plans cannot integrate with underlying individual policies in order to achieve compliance.
The agency’s message has met with some resistance in the benefits community. Some have argued that arrangements reimbursing individual health insurance premiums:
- Don’t violate the annual dollar-limit prohibition because premiums are outside the definition of “essential health benefits” and, thus, are exempt from the prohibition on annual dollar limits, and
- Can satisfy the preventive service mandate if designed to provide first-dollar coverage for preventive care.
The May guidance seems intended to refute this analysis, though it could have been more explicit — particularly regarding why premiums can’t be defined as essential health benefits. The guidance is also consistent with informal remarks by IRS officials at the March 2014 Employers Council on Flexible Compensation conference. There, agency reps stated that employer funding of individual health insurance policies with pretax dollars violates the annual limit and preventive services provisions.
By focusing on the magnitude of the excise taxes and the unanimity of the IRS, DOL and HHS positions, the May IRS guidance sends a clear warning. If, as noted in your original question, you’re contemplating an employer payment plan, you’d be well advised to choose another approach. And, for employers still using such an arrangement, it’s imperative to immediately consult with benefits and legal advisors about revising the plan to avoid or minimize penalties.