We at The Insurance Group work closely with Proskauer on compliance-related matters. This compliance notice is written by our compliance partner, Peter Marathas and his associate, Damian Myers.

11/7/2014

The Insurance Group has been telling you that two ideas that have been promoted by certain vendors should be avoided.  Now, in terms that are both clear and unambiguous, the U.S. Department of Labor (“DOL”), Health and Human Services and the Internal Revenue Service (“IRS”) (the “Agencies”) have confirmed what we and our legal advisors have been saying:  building upon prior guidance, the Agencies have eliminated any reasonable argument that employers can (i) establish any arrangement in which they reimburse employees for obtaining individual insurance coverage either on the Marketplace or directly from an insurer or (ii) provide incentives to high-cost claimants to drop employer coverage and obtain individual insurance.  The guidance, issued on November 6, was released as DOL FAQs Part XXII.

Reimbursement Arrangements

Certain vendors have been pitching ideas that they claim are magic elixirs for dealing with the Affordable Care Act (“ACA”).   In one idea, employers would eliminate their health insurance plans and establish accounts to reimburse employees for the cost of individual insurance coverage.  An employer subject to the “pay-or-play” requirements of the ACA would be subjected to the so-called “A Penalty” of $2,000 per full-time employee, but even factoring in the cost of the non-deductible penalty with the amount of the premium reimbursed, the employer would save premium subsidy and administrative costs.

DOL and IRS have addressed this idea and said that health reimbursement arrangements (HRA) not integrated with a group health plan or employer payment plans (collectively, “premium reimbursement arrangements”) are themselves group health plans and therefore violate the ACA, so the idea does not work.    See DOL Technical Release 2013-03, IRS Notice 2013-54.  The prior guidance left open the idea that employers could reimburse individual coverage on a post-tax basis.

The new guidance, however, clearly states that premium reimbursement arrangements are group health plans whether payment or reimbursement is provided on a pre-tax or post-tax basis.  Therefore, employers are no longer permitted to reimburse employees or pay insurers directly for individual health insurance policies.

We note that this guidance has potential  far-reaching implications.  While the Agencies’ clear focus was on the marketers who continued to promote these reimbursement strategies after the previous guidance, the inclusion of post-tax arrangements into the mix may well spell trouble for employers who routinely reimburse executives and others for their individual insurance costs—a practice that has been going on (and has been blessed by the IRS in the past) for years.  This happens in a number of situations, including when an executive or sales person or other employee lives or has family that lives in a part of the country where the group health plan does not provide good coverage.

 Marketplace Dumping

Another suspect recommendation to employers (especially with self-insured plans) is that they identify high-cost claimants and provide a cash incentive for them to drop employer coverage and obtain individual insurance coverage on the Marketplace.  Proskauer has been asked to comment on this approach in the past and has noted our belief that the suggestion would violate various federal laws, including ERISA’s nondiscrimination rules (added by HIPAA in 1996).  In the FAQ, the Agencies note that this practice discriminates based on one or more health factors for two reasons.  First, the offer of cash actually increases the premium because the individual with an adverse health factor must forgo the cash to elect group health coverage.  Thus, the individual with an adverse health factor effectively pays a higher premium than those without the adverse health factor.  Second, although the HIPAA nondiscrimination rules allow “benign discrimination” (i.e., discrimination that helps individuals with adverse health factors), this practice discourages enrollment in the group health plan and is, therefore, not benign.

What Employers Should Do

1. Reject any proposal that involves (i) incurring the “A Penalty” and reimbursing  individual premium costs or (ii) identifying high-cost claimants and incenting them to move to Marketplace  insurance;
2. Those who have are in the process of implementing these strategies should immediately stop and consider consulting with qualified counsel as to whether they might be able to recoup costs incurred; and
3. Immediately evaluate any arrangement in which an executive or other employee is reimbursed (on a pre- or post-tax basis) for individual insurance coverage (Note, however, that reimbursements on a pre- or post-tax basis for premiums for other group health insurance such as a spouse’s plan or COBRA coverage are still permitted).