Health Insurance and the Tax Code
For years, politicians, policy wonks, and various health insurance stakeholders have debated the merits of how the tax code encourages employer provided coverage, yet seemingly discourages the individual purchase of coverage outside of the workplace.
The primary example of this confounding situation is the fact that health insurance is tax deductible to an employer, yet not so to an individual who purchases coverage on their own, outside of the workplace. There are numerous tax incentives and benefits available to individuals who purchase health insurance, but virtually all of these incentives are attached to the purchase of employer based, group coverage.
With the relatively recent introduction of so called “defined contribution” health plan offerings to the benefits world (see Walgreens, Sears, Darden Restaurants, etc.), you can expect more pressure on the federal government to expand and change the current tax code.
Interestingly, the IRS recently issued guidance (Notice 2013-54) affecting two (2) tax advantaged spending accounts – Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs). (See http://www.irs.gov/pub/irs-drop/n-13-54.pdf
) The guidance places strict requirements on the use of these tax advantaged savings arrangements in conjunction with health insurance plans. In short, the guidance ties these arrangements to GROUP HEALTH INSURANCE PLANS, and indirectly discourages the establishment of INDIVIDUAL HEALTH INSURANCE PLANS.
Key provisions of this guidance affecting HRAs and FSAs follow:
HEALTH REIMBURSEMENT ARRANGEMENTS (HRA)
HRAs for Active Employees – For plan years beginning in 2014, employers cannot offer a stand-alone HRA to employees. Employers can only offer HRAs that are integrated with a group health plan.
Integrated HRAs – For an HRA to be integrated with a group health plan, the following requirements must be met:
– The HRA is only available to employees enrolled in group coverage;
– The employer must offer a group health plan that provides minimum value or that does not consist solely of excepted health benefits.
– The employee must be enrolled in a group health plan (either the employer’s plan or a spouse’s employer plan);
– If the group health plan is self-insured and does not cover certain Essential Health Benefits (EHBs), the HRA cannot be used to reimburse EHBs that are not covered by the group health plan; and
– The employee can waive future reimbursements from the HRA at least annually, and the remaining amounts in the HRA are forfeited if employment ends.
Retiree HRAs – A stand-alone retiree HRA that is used to pay health insurance premiums will be considered an employer-sponsored group health plan providing minimum essential coverage. As a result, a retiree covered by an HRA will not be eligible for premium tax credits through the Marketplace/Exchange.
FLEXIBLE SPENDING ACCOUNTS (FSA)
FSAs – A health care FSA does not have to comply with the ACA if:
– The employer also offers group health plan coverage; and
– The maximum annual FSA benefits payable to any employee do not exceed two times the employee’s contribution (or, if greater, do not exceed $500 plus the employee’s contribution).
Important: Employers may not reimburse an employee’s premiums or pay premiums directly to an insurance company to purchase individual health insurance for an employee.