Reimbursing Employees for Individual Health Insurance Premiums Comes with a $36,500 Per Employee Price Tag
The Connecticut Law Tribune
January 16, 2015
We all know that in order to attract and retain talent, employers must offer a competitive salary and benefits package that includes health insurance. For small employers, this offering can be very costly, especially if they offer a group plan. Until now, many small employers met this challenge by reimbursing employees for a percentage of their individual health insurance premium or a similar arrangement. This made sense since the employer’s contribution would be tax deductible and the employee’s contribution could be done using pre-tax dollars. At the end of last year, this practice became absolutely unlawful under the Patient Protection and Affordable Care Act (“ACA”).
Although it seems like this change occurred overnight, it has been coming for some time. Guidance released over the last two years paved the way for the November 6, 2014 guidance by the Department of Labor, Department of Health and Human Services, and the Treasury Department that made this change abundantly clear. This guidance, in conjunction with prior guidance, essentially overturns a 1961 Revenue Ruling that allowed employers to reimburse employees for the cost of their health plans, on a pre-tax basis.
The guidance states employer health care arrangements that include reimbursement of individual employees’ private health insurance premiums, including health reimbursement arrangements, and certain health flexible spending arrangements, are considered “group plans” under ACA. Although prior guidance appeared to allow the employer to reimburse employees on a taxable basis, the November 6, 2014 guidance has made it clear that it is irrelevant whether the employer treats the contributions on a pre-tax or post-tax basis. Therefore, these arrangements themselves must comply with the group market reform provisions of ACA. An employer cannot successfully argue that the health insurance plan complies with ACA because the employer’s arrangement cannot be integrated with an individual plan in order to comply with the provisions of ACA. The reimbursement arrangement itself must comply.
Among the group market reform provisions, two provisions make it impossible for these arrangements to be compliant with ACA. First, group health plans may not have lifetime or annual limits on the dollar amount of benefits an individual may receive. Prior to ACA, insurance companies would often cap benefits for individuals on an annual or lifetime basis to control costs. According to the guidance, an employer who contributes money to an individual health insurance plan is essentially promising to reimburse employees for medical expenses up to a certain amount. For example, Employer X tells employees it will give each of them $5,000 toward their individual health insurance. According to the guidance, the employer is putting a $5,000 cap on the individual benefits in violation of the law.
Second, group health plans must provide for certain preventative health services and cannot impose any cost-sharing requirements like co-payments or deductibles. In the above example, even though Employer X is giving the employee $5,000, Employer X is not providing a plan that pays for these preventative health services entirely which is in violation of this provision. (This is true even if the employee’s individual plan covers these services.)
Options for Small Employers
Despite this new guidance, small employers (those with fifty or less full-time equivalent employees) offering health insurance still have options. First, small employers can decide not to offer health insurance but instead give a salary increase. Employees can do this as long as they make it clear that the employees can spend the money on whatever they choose – whether health insurance or on a trip to Cancun. Keep in mind that between giving money for health insurance which is unlawful and giving employees money to use for whatever they choose, there is a gray area. For example, can an employer give employees a bonus and suggest that they buy health insurance with the money? Can an employer give employees the exact amount of money that health insurance costs? Since this guidance is new, these and many other questions are yet unanswered.
Second, small employers can simply decide not to offer health insurance at all; but is this really wise? Employees may react very negatively, especially if the company (and the industry) has historically offered coverage. Employers may then have trouble attracting and retaining talent.
Interestingly, if employers have a low-wage workforce, the employees will benefit from an employer not offering health insurance. The reason is employees who are offered health insurance at work are generally not eligible for subsidized coverage on an Exchange (as long as the offered insurance meets certain requirements). The low wage workers who are affected are those who make within 400% of the federal poverty line. Despite these facts, employers will have to sell to their employees the advantages of not getting insurance at work as most employees will presume the refusal to provide insurance is solely designed to save the employer money. Convincing employees to the contrary is possible, but will be hard.
Third, employers can decide to offer health insurance through a group plan. Because of ACA, there are many associations and groups which are offering small employers group plans that may be more affordable than employers think. Additionally, there may be other options available. For example, employers may offer a self-insured plan that does meet ACA rules. If an employer does this, however, it bears the risk of any extremely large claims, although it may be able to limit its risk by purchasing stop-loss protection.
While many, if not most, employers are aware of the penalties that large employers will face if they do not offer health insurance, they may not realize that ACA has a general penalty section with even greater penalties for employers who offer health insurance that does not comply with ACA standards. ACA provides that any employer, regardless of size, which offers a group health plan that does not comply with the requirements of ACA, will face an excise tax of $100 per affected individual per day. Therefore, if employers offer a plan that is not ACA-compliant, including reimbursing employees for part or all of their individual health insurance premiums, for one year, they will owe $36,500 per employee.
Given these penalties, small employers would be better off not offering health insurance at all rather than offering group health insurance that is not ACA-compliant. The same is true of large employers.
This guidance is not going away. The government has a strong interest in driving people to buy health insurance from state and federal exchanges and not the private insurance market and there is little chance of Congress changing the law in this regard. However, at some point this guidance may be challenged first on the agency level and subsequently in court. One strong argument against this interpretation of the guidance is that if the individual plan itself complies with ACA, it is irrelevant whether the monetary arrangement that pays for the health insurance is compliant. A final decision on such a challenge is likely many years away. For now, employers would be wise to consult competent legal counsel and their insurance broker to ensure compliance with ACA.
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Robert G. Brody is the founder of Brody and Associates, LLC. John F. Woyke is of Counsel at the Firm and Abby M. Warren is an associate at the Firm. Brody and Associates represents management in employment and labor law matters and has offices in Westport and New York City.