Employer Reimbursement of Individual Health Insurance Premiums
In other words, can an employer cancel the company group health plan, allow the employees to buy individual health insurance and reimburse the employ for the premium?
The simple answer is no. On November 6, the Department of Labor issued additional guidance on the affordable care act, FAQ Part 22, which explains that employers cannot reimburse individual policies.
Group Health Trends Downward
Many employers who were fed up with the high cost of group health insurance have been sending their employees to buy cheaper health insurance on the exchanges then reimbursing the employees for the premiums.
Small businesses with fewer than 50 employees have been dropping group health insurance plans at a rapid pace, which has been startling the insurance industry beyond even what many health insurers expected. It’s been estimated that more than 75% of small employers with 2-10 employees have dropped their group health insurance plans in 2014. Business owners choosing to drop their group insurance plans have cited high premiums as their motivating factor.
Aetna Inc. one of the nation’s largest insurers admitted to seeing a drop in their small business insurance and described it as “some erosion.” While WellPoint the nation’s second largest insurer, said it had lost more than 300,000 policyholders since the start of the year.
One business owner who wanted to remain anonymous said, “Why wouldn’t I send my employees to buy their own health insurance? It makes perfect financial sense. It’s cheaper than group insurance and it saves me and the employee money.”
The IRS and Department of Labor have been well aware of this disturbing trend but have been slow to issue guidance on the legality of the practice under The Affordable Care Act (ACA). And many Insurance agents have been touting the practice as perfectly legal provided the reimbursement is done through an official reimbursement arrangement commonly known as and HRA (Health Reimbursement Arrangement).
Is Individual Reimbursement Legal?
But the IRS says no. Under the provisions of ACA, If the employer uses an arrangement that provides cash reimbursement for the purchase of an individual market policy, the employer’s payment arrangement is part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax to the employee.
Under the Departments’ prior published guidance, the cash arrangement fails to comply with the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.
So if you are thinking the solution to reduce your health premiums and pay for your employee to participate in the exchange, the Department of Labor is aware that employers are doing this and are giving it careful scrutiny.