Employers Reimbursing Employees for Individual Coverage

Recently, the IRS issued guidance which places harsh penalties on employers that deploy the strategy of “dumping” employees into the Individual health insurance marketplace.  The guidance followed the White House’s objection to the idea of allowing employers the ability to provide employees with a lump sum of money with which to buy individual insurance on the exchange/marketplace.  This builds on guidance released last year from the Department of Labor (DOL) which was more broad in scope.  A previous blog post addressed the DOL guidance, which effectively “killed” the ability to use tax preferred funds from HRAs and FSAs to fund Individual health insurance premiums, regardless of the source of such coverage.

(see – http://sstevenshealthcare.blogspot.com/2013/12/health-insurance-and-tax-code.html )
The recent ruling and associated guidance is short and sweet.  Here’s the scoop…

First, the guidance.
From the IRS (recent), click – http://www.irs.gov/uac/Newsroom/Employer-Health-Care-Arrangements
From the DOL (last year), click – http://www.dol.gov/ebsa/newsroom/tr13-03.html

The simple, two (2) question Q&A issued by the IRS addresses so called “employer payment plans” in a very straight forward manner.  This approach involves an employer opting not to offer a group health plan to its employees; but rather, to reimburse employees for some or all of the premiums they pay for health insurance purchased either on or off a public marketplace/exchange.  Such an arrangement constitutes an actual “plan” which would fail to meet the various requirements of a “plan” for ACA purposes (e.g., prohibition of annual limits on essential benefits, coverage for preventive care without any cost sharing, etc.), by its very design and make up.  This failure results in a much more onerous penalty than the ACA’s employer mandate of either $2,000 or $3,000 per employee.  Rather, a violation of this variety results in an excise tax equal to $100, per employee, per day (or $36,500 per employee, per year).

The second question refers readers to the DOL guidance issued last year (see link above), which explains the disqualification of using Health Reimbursement Arrangements (HRAs) or Flexible Spending Arrangements (FSAs) to reimburse employees for some or all of the cost of Individual health insurance.

When the President was specifically asked if the (ACA) law might hasten the erosion of employer-sponsored (or Group) insurance, his reply was – “I don’t think that an employer-based system is going to be, or should be, replaced anytime soon”.  The IRS guidance, building off the previous DOL release would certainly comport with the President’s quote.