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The Dangers of Premium Reimbursement Arrangements

The IRS, DOL and HHS (referred to collectively below as “the Agencies”) continue to “close the door” every possible arrangement by which a current employee can have his or her individual major medical insurance premiums paid or reimbursed pre-tax by their employer.  The IRS has warned several times that employers who persist in offering such arrangements will be subject to a number of penalties, including the $100 per day per employee penalty imposed under Code Section 4980D.

An advisor who continues to suggest that such an arrangement is permitted should make certain that the limits on their Errors & Omissions insurance is adequate to cover potential lawsuits.

A Summary of Prior Guidance:

  1. Employer Payment or Reimbursement of Premiums for Individual Health Insurnace constitutes a “Group Health Plan”  The agencies consider that an employer creates a “Group Health Plan” subject to Affordable Care Act (“ACA”) requirements when the employer promises to pay or reimburse employees’ premiums for individual major medical coverage because the arrangement’s purpose is to provide medical care.
  2. The ACA has requirements with which all “Group Health Plans” must comply. These requirements include such things as no cost-sharing on preventative care and restrictions on annual and life time benefit limits.  The “Group Health Plan” that consists of the payment of premiums does not meet these requirements on its own and therefore can only meet them if it is “integrated” with the major medical policy that provides these benefits.
  3. “Group Health Plans” cannot be integrated with Individual Coverage to satisfy these requirements. The Agencies have issued detailed regulations outlining what is required to integrate a “Group Health Plan” with a major medical policy.  In September of 2013 the Agencies issued guidance that a “Group Health Plan” can not be integrated with individual major medical policies.  Therefore, any arrangement by which an employer pays the premiums on an employee’s individual major  medical coverage, or reimbursed the employee for the premiums for that coverage, on a pre-tax basis would be a plan that violates the Affordable Care Act and will be subject to enforcement penalties.

New Guidance on After-Tax Arrangements:

Some employers have an after-tax arrangement by which the employer reimburses an employee for the employee’s individual major medical premiums when the employee provides proof that the premium has been paid.  The employer then grosses up the employee’s W-2 by the amount of the reimbursement.  The Agencies have indicated that such an arrangement is a “Group Health Plan” that violates the ACA.

The only payment or reimbursement arrangement using individual major medical policies that will apparently not violate the ACA is where each employee is provided a fixed dollar amount that can be used to purchase individual major medical insurance.  The employee then has the option to take the additional compensation in cash or to use the money to pay for, or to be reimbursed for, his or her individual major medical premium.  This fixed dollar amount is always included in the employee’s taxable compensation.

Code Section 105 Plans Marketed by Some Vendors

Some vendors continue to market an arrangement in which employees receive premium tax credits for individual coverage purchased through an Exchange and then have their individual policy premiums reimbursed by their employer under Code Section 105.  The Agency guidance clarifies that these arrangements violate health care reform.

Offering High Claims Risk Employees a Choice between Cash and Enrollment in the Employer’s Group Health Plan. 

Some advisors have suggested that employers could reduce costs by providing incentives for high-claims employees to purchase Exchange coverage instead of enrolling in the employer’s plan.  The Agencies have closed the door on this strategy by clarifying that an arrangement that offers only high claims risk employees a choice between cash and enrollment in the employer’s group health plan constitutes prohibited health status discrimination under health care reform and HIPAA.

This review is intended primarily to be a brief overview of  recent developments concerning premium reimbursement arrangements and is not intended to be legal, accounting or other professional advice.  Advantage Administrators assumes no liability whatsoever in connection with its use, nor are these comments directed to specific situations.