Last Thursday was likely a tough day for our competitors. The Treasury, HHS and the Department of Labor released FAQ XXII entitled Compliance of Premium Reimbursement Arrangements. There are three questions addressed in this FAQ, one of which one specifically refers to vendors marketing Section 105 reimbursement plans (e.g., HRAs) for individual insurance policies. All three specifically point out legal problems with employers reimbursing individual insurance policies, whether they do so with pre-tax or post-tax dollars.
After reading this news, many of our broker partners asked us to confirm that our solution complies with the ACA and the regs surrounding it. The answer is yes, our solution is compliant, and just to be safe, we have confirmed this with our Washington DC-based, $1,000-per-hour counsel.
How we ensure compliance at Benefitter
The reason our solution is compliant is that we do not reimburse employees for their individual health insurance policies. This was a very clear design decision based on thoroughly reviewing previous guidance issued over the past 2 years on this topic and determining that reimbursing premiums for individual plans could jeopardize our employer clients and their employees as well as our broker partners.
For those of you who are new to Benefitter, at a high level here is what we do to help employers transition to the individual insurance market:
1. We compare the cost of group health insurance to subsidized individual insurance.
2. We recommend a compliant SmartContribution approach for employers to add compensation in a thoughtful, legal way. Employees can then choose to purchase individual health insurance for about what they paid for group health insurance (after taking into account the added compensation as well as any subsidies).
3. We help employers communicate this SmartContribution approach to employees.
4. We help employees get enrolled in health insurance (or our broker partners do this).
5. We administer an ongoing system to manage SmartContribution for existing and new employees.
Summary of IRS Guidance
For those of you who like to understand the details of what this FAQ and previous FAQs are saying, here goes my lay person attempt at providing clarity on taxation laws…something I don’t recommend for the faint of heart.
The IRS is saying that reimbursing individual premiums (pre- or post-tax) is essentially the same as offering group health insurance. However, the IRS is also saying that reimbursing premiums is not sufficient for meeting the requirements of an ACA compliant group health insurance plan, for a variety of reasons, including the fact that an insurance premium is a limited amount of money and all group health insurance must have unlimited essential health benefits and must include $0 preventative care. Note: many folks, myself included, do not agree with this conclusion since individual insurance policies meet ACA requirements, but I’m guessing neither you nor I write the rules. Therefore, the IRS has concluded that a company that reimburses individual premiums will be offering a non-ACA compliant group health insurance plan and would be subject to penalties, which can be as high as $100 per employee per day ($36,500 / employee / year). Moreover, employees who receive such reimbursements are deemed to be participating in a group plan, albeit a non-compliant one, and are ineligible for premium tax credits in the government exchanges. This is not a mistake you want to make.
These FAQs are effectively repeating guidance that has been provided several times already, in FAQ XI, DOL Technical Release 2013-03, and IRS Notice 2013-54. Several people I have spoken with think that this FAQ was issued not to announce new guidance, but rather to pre-empt adoption HRAs as a tax-free way to reimburse employees’ individual premiums.
Parting thoughts
The fact that Treasury, HHS and the Department of Labor have invested so much time in repeatedly addressing this topic is an indication of the tremendous interest in this space. Many employers rightly see the individual health insurance market as an alternative to the group market and the need to satisfy that interest in a way that complies with the complex rules. Benefitter is in business to provide employer clients and brokers elegant, compliant solutions that allow them to advantage of this opportunity. Let us know if this answers your questions.