The Bell Tolls for Employer Payment for Individual Policies

Many employers, especially smaller employers who do not sponsor a traditional group health plan, have had a practice of paying for, or reimbursing the cost of, individual health coverage policies for employees. This type of arrangement is a group health plan subject to the requirements of the Employee Retirement Income Security Act (“ERISA”) and the employer contribution is not included in the employees’ income under the Internal Revenue Code (“Code”). In September 2013, the Internal Revenue Service (“IRS”) issued Notice 2013-54 and the Department of Labor (“DOL”) issued parallel guidance in Technical Release 2013-3 (collectively referred to in this discussion as the “Guidance”), which, we believe, effectively ended the ability of employers to pay for individual policies of their employees. Certainly, the remaining options are severely limited.


The Guidance is generally effective January 1, 2014, and discusses the application of certain provisions of the Affordable Care Act (the “ACA”) to health reimbursement arrangements (“HRAs”), health flexible spending accounts and group health plans under which an employer either pays directly for, or reimburses the employee for, premiums for individual health coverage. The latter are referred to as “employer payment plans” (“EPPs”). The IRS recently issued FAQs on Employer Health Care Arrangements (which can be found at http://www.irs.gov/uac/Newsroom/Employer-Health-Care-Arrangements) that, among other things, describe the penalties for a failure to follow the Guidance – a $100/day excise tax per applicable employee.


Employer Payment Plans and the Affordable Care Act


The Guidance provides that an EPP is a group health plan, and like all group health plans, it must meet the market reform requirements of the ACA. However, according to the government, EPPs by definition cannot meet those requirements. Specifically, an EPP would not meet the ACA requirements that group health plans not apply annual dollar limits on essential health benefits and must cover preventative services without cost sharing. According to the Guidance, an EPP would not meet the prohibition on annual dollar limits because an EPP is considered to have an annual dollar limit up to the cost of the individual coverage with respect to which payment or reimbursement is made, and the EPP cannot be integrated with the individual policy in order to meet this requirement (see Q&A-1 of the Guidance). Similarly, the EPP cannot meet the preventive services requirements of the ACA because it does not itself provide for payment of preventive services without cost-sharing in all instances and the EPP cannot be integrated with the individual health coverage policy in order to meet this requirement (see Q&A-3 of the Guidance). Accordingly, an EPP will not meet these requirements of the ACA and therefore such arrangements will be subject to penalties on or after January 1, 2014.


Note, however, that the Guidance does provide that an HRA can be integrated with a group health plan (and thereby meet the market reform requirements) where an employee is covered under non-HRA coverage that provides minimum value, even if the employer does not sponsor the coverage, such as an employee who is covered under his spouse’s employer’s group health plan. In that situation, the employee’s employer must sponsor a group health plan that provides minimum value even though the coverage is being provided under another employer’s (in this case, the spouse’s employer’s) group health plan. Presumably the same would apply where an employee is covered under the group health plan of a former employer under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”).


After-Tax Exceptions


There has been some discussion whether after-tax payment or reimbursement of individual health coverage policies could be continued after January 1, 2014. However, the guidance makes no such distinction. The critical issue is whether the EPP, either pre- or post-tax, is a group health plan, and therefore subject to the ACA requirements.


The Guidance does provide for two after-tax exceptions to the definition of an EPP. They are exceptions not because they are after-tax, but because they are not group health plans and therefore not subject to the market reform requirements of the ACA. These exceptions are:

  • After-tax payment of premiums for individual policies, where the employee has a choice between cash or the health coverage; or

  • An arrangement where the employer forwards the employee’s after-tax payment for coverage under an individual policy, as long as the arrangement meets the requirements of a voluntary plan under ERISA.

The first situation not only requires that the payment be made on an after-tax basis, but it also requires that the employee have the option to take the employer contribution as cash rather than putting it towards health coverage. In the second situation the arrangement must meet the voluntary plan requirements, which means, among other factors, that there cannot be an employer contribution and any employee contribution cannot be paid pre-tax through the employer’s cafeteria plan.


What Options Remain?


Employers who offer a non-compliant EPP after January 1, 2014 will be subject to self-reported excise taxes of $100 per day, per employee, during the time such an arrangement exists. Clearly this is no longer a viable option. However, there are many reasons that an employer would want to help its employees pay for individual health coverage, not the least of which is helping employees maintain health coverage that will meet the employees’ obligations under the ACA individual mandate which is in effect now.


How an employer can accomplish this in the wake of this Guidance is to provide employees with additional taxable compensation that the employees may voluntarily use to purchase individual health coverage or take as cash. Employers that fail to offer health coverage to their full-time employees may suffer a tax penalty under Code Section 4980H. This approach has some negative implications:

  • The additional compensation cannot be conditioned upon the employee obtaining health coverage and so may not satisfy an employer whose goal is to ensure its employees actually have health coverage. Although with the “stick” provided by the individual mandate, presumably some, if not all, employees will seek coverage.

  • The additional compensation will result in an increased tax burden for employees, unless the employer is also willing to provide a “gross up” for the additional taxes incurred by the employee.

An employer who chooses to establish some arrangement outside these exceptions risks the significant penalties of non-compliance.