Devotees of the Affordable Care Act (ACA) will know all too well that the IRS originally put the kibosh on employers reimbursing the cost of individual insurance policies. Well, as times change, so can the rules, but the new flexibility comes with some strings attached and leaves open some issues and questions.
The Departments of Health and Human Services, Labor, and Treasury (the Departments) have now proposed to let employers to reimburse employees for individual health insurance policies and expanded the use of health reimbursement arrangements (HRAs) for other ancillary types of coverage/excepted benefits. This article will focus on the reimbursement of individual health insurance policies, the open questions the proposal leaves, and the potential pitfalls for employers, if the rules are finalized as proposed.
The Current Landscape (Still Applies)
It bears repeating that this is a proposal. Nothing has changed yet. Even if finalized, these rules would not go in to place until 2020 at the earliest. Therefore, employers should bear in mind that the existing rules (which impose substantial penalties for reimbursing for individual health insurance premiums) still apply. The main concern the IRS previously had was that employers would send their unhealthy employees with high cost claims into the individual insurance market, but keep all their healthy employees on the employer’s plan. This approach, sometimes referred to as “dumping,” could destabilize the individual insurance market.
The proposed rules attempt to address dumping with some guardrails. Specifically:
- The rules allow employers to offer the HRA only to specific classes of employees (or a combination of classes), but they have to offer the HRA to all employees in that class (or combination of classes). The classes are:
- Unionized employee
- Employees who have not satisfied the group health plan’s waiting period
- Employees who have not reached age 25 before the beginning of the plan year
- Non-resident aliens with no U.S.-source income
- Employees whose primary employment site(s) are all in the same insurance rating area (as defined by the ACA)
Notably absent from the list is salaried versus hourly. The Departments were concerned that those categories were too easily manipulated to allow employers to move unhealthy employees into one or the other so they could receive an HRA instead of a traditional group health plan.
- The HRA can only be available to employees (and their dependents) who are actually enrolled in individual market coverage.
- Employees cannot be offered both this HRA and a regular group health plan. It has to be one or the other.
- The HRA must be offered on the same terms to all employees who are enrolled. However, the maximum reimbursement can increase as the age of the employee increases and as the number of dependents enrolled increases.
- Participants must be given the right to opt-out of future reimbursements at least once a year and on termination of employment.
- The employer must have reasonable procedures to verify that the employee and dependents are actually enrolled in individual coverage. Employers can have the employee attest that they are covered or provide documentation (like an EOB or insurance card). The employer must ask for this verification at enrollment and every time a reimbursement is requested.
- A notice must be given to all employees at least 90 days before the beginning of the plan year. The notice has specific content requirements. Among other items, the notice must let the employee know that they cannot receive a premium tax credit/subsidy for individual coverage if they take the HRA and they may still not be able to get the subsidy even if they opt-out of the HRA.
Because this is a proposal, the details may change. However, in all likelihood, the above broad requirements will remain.
Notably, the Departments did remove a key hurdle. The proposed new rules would not make the individual insurance policies part of the ERISA plan. In other words, only the HRA would need to comply with ERISA’s requirements (like issuing a summary plan description or filing Forms 5500). This is significant because it means an employer will not be left having to summarize each separate individual policy or obtain information from each carrier to complete a Form 5500.
However, this comes with a catch. To get the benefit of this ERISA exemption, the employer has to basically be 100% hands off on the individual insurance policies. Specifically:
- Employee participation has to be completely voluntary;
- The employer cannot select or endorse any particular issuer or insurance coverage;
- No premiums, other than individual health insurance premiums, can be reimbursed from the HRA (however, non-premium out-of-pocket expenses, like co-payments and deductibles, can be reimbursed);
- The employer receives no consideration (money or other benefit) in connection with the employee selecting or renewing a policy; and
- Each participant is notified annually that the individual policies are not subject to ERISA.
Employers with voluntary benefits will likely recognize these conditions for keeping those benefits “out of” ERISA.
Issues to be Addressed
The Departments did mention two specific issues that they will address in the future. First, how (if at all) does offering an HRA satisfy the ACA employer mandate? The Departments noted that, if the HRA is offered to at least 95% of the employer’s full-time employees, then it would satisfy the “(a)” penalty, but not the “(b)” penalty. However, the Departments said that they intend to issue additional guidance that would make the HRA satisfy the “(b)” penalty as well. This means that employers who adopt HRAs that follow the as-yet-unreleased guidance can avoid ACA employer mandate penalties. (Employers not familiar with the employer mandate should see some of our prior articles here.)
Additionally, the proposal to allow HRA reimbursement to increase due to age was puzzling. Under existing nondiscrimination rules, the HRA would be considered discriminatory if reimbursements vary based on age. The Departments said they plan to propose guidance that would address this problem.
Unresolved Issues and Potential Pitfalls
Even with those to-be-released clarifications, the proposal still leaves some questions unanswered. Additionally, it creates some potential land mines for employers and leaves employers with some (unavoidable) administrative burdens.
- The biggest pitfall is the restrictions for keeping the individual policies out of ERISA. This means the employer has no ability to negotiate price or pick carriers. Employers can easily trip up over the “no endorsement” requirement. The stakes here are potentially higher for this than for voluntary benefits since health insurance is a more high-profile and often used benefit than many voluntary benefits. Failing to meet these requirements could trigger penalties for:
- Failing to distribute required communications, like summary plan descriptions ($110/day)
- Failing to file complete Form 5500 annual reports to the government ($2,140 per day)
- This effectively makes employees solely responsible for making their own coverage selections and determinations. Given the complexity, and varying terms, of health insurance, many employees may have difficulty navigating this market on their own.
- An additional complicating factor, especially for larger employers, is that they may end up sending payments to a large number of carriers, rather than just one or a few under a group health plan. This presents additional potential for missed payments and errors that would need to be resolved.
- Employers could allow employees to pay for any remaining premium that the HRA does not cover through a cafeteria plan. This would let employees pay those premiums pre-tax. However, as the preamble to the rules correctly points out, this is not available for coverage offered through the ACA Exchange. That means employers would need to confirm that the coverage employees have is off-Exchange coverage.
- Employers that previously only had an insured plan and switch to an HRA will have to adopt policies and procedures to comply with HIPAA. Because the HRA is a self-funded plan, there is no “hands off” protected health information exception, like there is for fully-insured plans.
- Also, because the employer does not sponsor the individual policies (assuming they stay out of ERISA, as noted above), that means the carrier cannot share information with the employer about claims. This means the employer cannot assist an employee with a claim under the policy without the employee signing a release allowing the carrier to share information.
- COBRA would still have to be offered for the HRA (although not for the individual policies, if they are not part of the ERISA plan).
- Unlike group health plans, individual plans are not required to pay before Medicare for Medicare-eligible individuals. Some individual plans may even specify that, once someone is Medicare-eligible, they pay “as if” the person is enrolled in Medicare whether they’re actually enrolled or not. For employers, this could mean employees who are Medicare-eligible (due to age or otherwise) are left holding the bag once their Medicare eligibility kicks in if they don’t actually enroll in Medicare. This will depend on the terms of the policy.
- Despite the notices that the proposal requires, the presence of the HRA reimbursing for individual insurance is likely to create employee confusion when it comes to buying individual coverage. Employers already have a challenge where employees will sometimes represent to an ACA Exchange that they are not offered affordable coverage from their employer. They do this (whether intentionally or not) to receive a subsidy to pay for individual coverage. The complexity of this arrangement is likely only going to increase that employee confusion, which may mean more employees attempting to get subsidies. This creates work for the employer because the employer may receive a notice that an employee received a subsidy. The employer then has to appeal to correct the record and may receive inquiries from the IRS about possible employer mandate penalties.
While the guidance is only proposed at this point, it is unlikely that the final rules will do much to address any of these concerns. As a result, employers that might want to consider this should consider whether the risks and burdens presented by the proposal are sufficient to justify making a wholesale change and the attendant employee disruption that could result.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.