Employers trying to continue offering affordable health and welfare benefits amid the expanding costs and regulations enacted under the Patient Protection & Affordable Care Act (ACA) often are encouraged by some consultants and brokers to consider offering coverage options pursuant to a “private exchange.”
While these options sound attractive, not all work for all employers.
The consumer-driven healthcare and other private exchange lingo used to describe these arrangements often means different things to different people. Some “private exchanges” are little more than high-tech online cafeteria enrollment arrangements. (See, e.g., A ‘Cynical’ Look at Private Exchanges.)
Employers need to scrutinize proposals both for compliance and other legal risks, affordability and cost and other suitability. When considering a private exchange or other arrangement, it is important to understand clearly the proposal, its design, operation, participating vendors, the charges, what is excluded or costs extra and who is responsible for delivering what.
Agencies have issued a long stream of guidance cautioning employers against paying for or reimbursing premiums for individual policies or the cost of enrolling in coverage under a public health insurance exchange. (See, e.g., 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 available here. )Most recently, the new FAQS About Affordable Care Act Implementation (XXII) (FAQ XXII) published by the agencies on Nov. 6, 2014, reiterates agency guidance indicating that tax basis for purchasing individual coverage in lieu of group health plan coverage. FAQ XXII, among other things, states:
- Health reimbursement accounts (HRAS), health flexible spending arrangements (health FSAs) and certain other employer and union healthcare 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) but
- 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 healthcare 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).
FAQ XXII reinforces this prior guidance, stating, “Such employer healthcare 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.”
Another potential issue arises under the various tax and non-discrimination rules of the code and other federal laws. For instance, Code sections 105, 125 and other Code provisions against discrimination in favor of highly compensated or key employees could arise based on the availability of options or enrollment participation. Historically, many have assumed that these concerns could be managed by treating the premiums or value of discriminatory coverage as provided after-tax for highly compensated or key employees. However, IRS and Treasury leaders over the past year have made statements in various public meetings suggesting that the IRS does not view this as a solution. Of course, FAQ XXII also highlights the potential risks of underwriting or other practices of offering individual or other coverage in a manner that discriminates against disabled, elderly or other employees.
In addition to confirming that the arrangement itself doesn’t violate specific Code or other requirements, employers and others responsible for structuring these arrangements also should critically evaluate and document their analysis that the options offered are suitable. Like other employee benefit arrangements, ERISA generally requires that individual or group products offered by employers, unions or both be prudently selected and managed. Compensation arrangements for the brokers and consultants offering these arrangements also should be reviewed for prudence, as well as to ensure that the arrangements don’t violate ERISA’s prohibited transaction rules. Eligibility and other enrollment and related administrative systems and information sharing also should be critically evaluated under ERISA, as well as to manage exposures under the privacy and security rules of the Health Insurance & Portability Act (HIPAA) and other laws.
As a part of this analysis, employers and others contemplating involvement in these arrangements also will want to review the vendor contracts and operating systems of the vendors that will participate in the program for legal compliance, prudence for inclusion, prohibited transactions and other legal compliance, as well as to ensure that the contract holds the vendor responsible for delivering on service and other expectations created in the sales pitch. In reviewing the contract, special attention should be given to fiduciary allocations, indemnification and standards of performance, business associate or other privacy and data security assurances required to comply with HIPAA and other confidentiality and data security requirements and the like. The contractual commitments from the vendor also should cover expected operational performance and reliability as well as legal compliance and risk management.