No More Pre-Tax Premiums for Individual Insurance Policies?
Over the years we have seen some employers, particularly small employers, choose to provide health coverage to their employees by paying all or part of the premium for individual insurance policies that the employees have obtained. Under an old IRS revenue ruling, Rev. Rul. 61-146, that type of premium subsidy could be provided on a pre-tax basis so long as the employer either paid the insurance company directly or reimbursed the employee for the cost of the coverage. Some employers have been considering that model for providing coverage to employees under the Affordable Care Act (“ACA”). Employers were hoping that by providing funds to employees to purchase coverage on the individual market, the employer could avoid the penalty for failure to offer coverage while limiting the employer’s cost. In recently issued guidance, the IRS and the Department of Labor have essentially said no to this alternative.
Under the ACA, employers who offer group health plans must not impose any annual or lifetime limits on essential health benefits. They must also provide preventive health services without copays or coinsurance. Insurance policies in the individual market will provide that first dollar coverage for preventive care and will not have the annual limits. Thus, employers thought that by subsidizing those coverages the employers would meet the requirement for providing health care coverage without those limits. In recently issued guidance the IRS and the Department of Labor (DOL) have made it clear that premium subsidies for individual coverage will not be viewed as meeting those requirements.
The technical way that the IRS and DOL reach this conclusion is by viewing the premium subsidy plan as a health reimbursement arrangement or HRA, which is a type of group health plan funded by the employer. Under an HRA, an employer provides covered employees with a fixed dollar amount annually to be used for health care expenses. Sometimes excess amounts can be carried over from year to year. The reimbursements available under the HRA are limited to the amount in the account. The IRS and the DOL have said that such an arrangement does not need to meet health care reform requirements, such as no annual limits and preventive care coverage, only if it is “integrated” with a plan that provides that coverage. The new guidance says that an HRA can be “integrated” only with a group health plan and not with an individual market plan. Therefore, an employer can continue to pair an HRA with a group health plan but cannot pair the arrangement with an individual health insurance policy and avoid ACA penalties.
The guidance also states that because an HRA is a group health plan, coverage under an HRA is considered minimum essential coverage for purposes of health care reform’s individual mandate. Under the individual mandate, most people in the United States must maintain minimum essential health coverage or pay a tax penalty. Individuals who are not offered such coverage by their employers can obtain premium subsidies through the Marketplace, previously known as the Exchange. Because HRA coverage can be minimum essential coverage, employers offering such coverage must give employees the ability to elect out of the coverage on termination of employment and annually while employed. That will allow employees to forego HRA coverage in favor of coverage under the Marketplace with a premium subsidy. The IRS and DOL reached this result by requiring “integrated” HRAs (which are the only HRAs that meet health care reform requirements) to allow such opt outs.
The IRS did not revoke the 1961 Revenue Ruling permitting pre-tax payment of employee premiums for individual market policies. Some employers are hoping that they can continue to allow employees to pay for individual market health insurance policies on a pre-tax basis through a cafeteria plan even if the employer provides no subsidy for the coverage. The recent guidance is not clear on that point. Small employers are permitted to subsidize policies on the Marketplace through the Small Business Health Option Program or SHOP that is part of the Marketplace. This will allow small employers to establish programs to subsidize coverage that employees choose, but employees will be limited to the plans available under SHOP.
Under the ACA, there is a $100 a day excise tax imposed on employers who sponsor group health plans that fail to meet the annual limit and preventive care requirements. Small employers are not exempt from this tax.
The new guidance is effective for plan years beginning on or after January 1, 2014. Employers thinking that they could rely on premium subsidies for individual health insurance coverage will need to rethink their strategy for providing health coverage to their employees.
Contact Benefits Notes for more information.