November 7, 2014
Important Guidance on ACA Health Plans
New FAQs confirm that employers can’t reimburse employees for purchasing individual coverage, despite what some vendors say.
The new FAQS About Affordable Care Act Implementation, published Nov. 6, 2014, confirm that employers can’t reimburse employees for purchasing individual coverage, even though various vendors are promoting that approach in lieu of group health plan coverage.
FAQ XXII makes clear that the departments of Labor, Health and Human Services and Treasury object to this practice. FAQ XXII makes clear that the departments consider ACA’s market reforms to outlaw any arrangement pursuant to which an employer provides cash reimbursement to employees for the purchase of an individual market policy, regardless of whether the reimbursement is paid on a pre- or after-tax basis.
This position is consistent with previous guidance that the departments have published, that health reimbursement arrangements (HRAs), health flexible spending arrangements (health FSAs) and certain other employer and union health care arrangements where the employer promises to reimburse health care costs are: considered group health plans subject to the Public Health Service Act (PHS Act) § 2711 annual limits, PHS Act § 2713 preventive care with no cost-sharing and other group market reform provisions of PHS Act §§ 2711-2719 and incorporated by reference into the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code).
HRA or other premium reimbursement arrangements do not violate these market reform provisions when integrated with a group health plan that complies with such provisions. However, an employer health care arrangement cannot be integrated with individual market policies to satisfy the market reforms. Consequently, such an arrangement may be subject to penalties, including excise taxes under section 4980D of the Internal Revenue Code (Code). (See, DOL Technical Release 2013-03; IRS Notice 2013-54; Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare Arrangement; IRS May 13, 2014 FAQs.)
FAQ XXII reinforces this prior guidance, stating, “Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code. Under the departments’ prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy.” (See, DOL Technical Release 2013-03; IRS Notice 2013-54; Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare Arrangements, Sept. 16, 2013.)
FAQ XXII also confirms the departments’ view that arrangements where a vendor markets a product to employers claiming that employers can cancel their group policies, set up a Code section 105 reimbursement plan that works with health insurance brokers or agents to help employees select individual insurance policies, and allow eligible employees to access the premium tax credits or other HRA dollars to pay for Marketplace coverage are illegal.
According to FAQ XXII, these arrangements are problematic for several reasons, including:
The arrangements themselves are group health plans. Therefore, employees participating in such arrangements are ineligible for premium tax credits (or cost-sharing reductions) for Marketplace coverage. The mere fact that the employer does not get 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. Department of Labor guidance indicates that the existence of a group health plan is based on many circumstances, including the employer’s involvement in the overall scheme and the absence of an unfettered right by the employee to receive the employer contributions in cash.
Under DOL Technical Release 2013-03, IRS Notice 2013-54 and the two IRS FAQs addressing employer health care arrangements, such arrangements are subject to the market reform provisions of the Affordable Care Act, including the PHS Act § 2711 prohibition on annual limits and the PHS Act § 2713 requirement to provide certain preventive services without cost sharing. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act §§ 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under Code § 4980D.
FAQ XXII also confirms the department’s position that an employer violates the ACA provisions of PHS Act § 2705, ERISA § 715 and Code § 9815, as well as the Health Insurance Portability & Accountability Act (HIPAA) nondiscrimination provisions of ERISA section 702 and Code § 9802 prohibiting discrimination based on one or more health factors if it offers selectively only to employees with high claims risk a choice between enrollment in its standard group health plan or cash.
FAQ XXII clarifies that while the departments’ regulations allow more favorable rules for eligibility or reduced premiums or contributions based on an adverse health factor (sometimes referred to as benign discrimination), in the departments’ view this position does not extend to cash-or-coverage arrangements offered only to employees with a high claims risk. Accordingly, FAQ XXII states such arrangements will violate the nondiscrimination provisions, regardless of whether (1) the cash payment is treated by the employer as pre-tax or post-tax to the employee, (2) the employer is involved in the selection or purchase of any individual market product or (3) the employee obtains any individual health insurance.
Beyond these concerns stated in FAQ XXII, employers and others contemplating offering such a choice also should discuss potential exposures under the Americans With Disabilities Act (ADA) and, depending on the nature of the condition, Medicare law.
In light of this new guidance and previous guidance published by the departments, employers and others sponsoring or contemplating engaging in these arrangements are encouraged to contact competent counsel for assistance in understanding the potential concerns raised by involvement in these practices and their resolution.