Employers' Cash Subsidies for Health Policies From Exchanges Violate ACA, Guidance Says

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By Larry Reynolds and Matthew Loughran

An employer cannot provide cash for reimbursement of an employee's purchase of an individual policy on an insurance market without violating the market reforms in the Affordable Care Act, according to newly issued guidance from the federal government.

The guidance, jointly issued Nov. 6 by the Departments of Treasury, Labor and Health and Human Services, also included a warning against employers offering high-claims-risk employees a cash subsidy to encourage them to opt out of the employer's group health plan.

These situations, as well as one in which an employer cancels its group policy and then uses a reimbursement plan to help employees select individual policies, violate the market reforms in the law, the guidance said.

In the most basic scenario addressed in the guidance, the employer offers its employees cash to reimburse them for premiums. This violates the ACA because it is the equivalent of a group health plan and may trigger penalties when integrated with an individual policy purchased on the market.

The most complex arrangement in the guidance involves a product offered by a vendor to an employer that cancels its group health policy and then creates a reimbursement program with health insurance brokers to help the now uninsured employees purchase individual insurance policies, giving them access to the premium tax credits for coverage from the insurance marketplace.

Some Vendors Giving Incorrect Advice

Although the ACA overturned previous guidance from the Internal Revenue Service (Revenue Ruling 61-146) that allowed employers to reimburse employees pre-tax for individual coverage, some vendors continue to advise employers to enter into illegal arrangements, said a November blog by the consulting firm Kushner & Company.

The agencies have been “very clear that with one very narrow exception [health reimbursement arrangements for retiree-only plans], no pre-tax or after-tax employer reimbursements could be made for the purchase of individual coverage,” Kushner said.

As a result, employers considering these reimbursement accounts “should consult with their legal counsel, since the IRS seems to be making a point to let employers know some of these arrangements are not permissible and will result in excise taxes on the employer” of $100 a day per applicable employee, or $36,500 per year per employee, Kushner said.

“After-tax arrangements to pay for individual health insurance policies appear to be permissible, but employers who pay for individual health insurance policies on an after-tax basis must be careful,” said a June 11 blog post by the law firm Snell and Wilmer.

According to IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits, payments to current or former employees for premiums to maintain medical coverage under the Combined Omnibus Budget Reconciliation Act are allowed and are nontaxable.

To contact the reporter responsible for this story: Larry Reynolds at lreynolds@bna.com

To contact the editor responsible for this story: Michael Baer at mbaer@bna.com