Employers Ask: What Prevents Me from Reimbursing Individual Health Insurance Policies?
By Danielle Capilla
Chief Compliance Officer
United Benefit Advisors
In serving 36,000 employers and 5 million employees, our UBA Partners get this question frequently: What federal guidance prohibits employers from reimbursing individual health insurance policies?
Answer: The IRS has issued extensive guidance prohibiting employers from reimbursing health insurance policies on an individual basis. It issued two notices in 2015 that addressed this issue.
In February 2015, the IRS provided greater detail on the issue when it issued Notice 2015-17, which addresses employer payment or reimbursement of individual premiums in light of the requirements of the Affordable Care Act (ACA). For many years, employers were permitted to reimburse premiums paid for individual coverage on a tax-favored basis, and many smaller employers adopted this type of an arrangement instead of sponsoring a group health plan. However, these "employer payment plans" frequently are unable to meet all of the ACA requirements that took effect in 2014, and in a series of Notices and frequently asked questions (FAQs) the IRS has made it clear that an employer may not either directly pay premiums for individual policies or reimburse employees for individual premiums on either an after-tax or pre-tax basis. This is the case whether payment or reimbursement is done through a health reimbursement arrangement (HRA), a Section 125 plan, a Section 105 plan, or another mechanism.
The notice reiterates this position. It also clearly states that an employer may increase an employee's taxable wages to help cover the cost of health coverage if it chooses not to offer coverage, but the employer may not require an employee to purchase health insurance or certify that he or she has coverage in order to receive the bonus or other wage increase. If the bonus or increase is specifically designated as a premium reimbursement or if it must be used for premiums, this would be an impermissible employer payment plan.
Under these rules, if the employer reimburses or directly pays premiums for individual coverage, on either a pre-tax or after-tax basis, it has created a noncompliant group health plan and the $100 per day per employee penalty would apply. Reimbursement and payment of group health premiums is still allowed.
Most recently, in December 2015, in Notice 2015-87, the IRS restated that employer arrangements that reimburse the cost of individual market coverage under a cafeteria plan will not be integrated with the individual market coverage and that these arrangements will be unable to comply with the ACA's annual dollar limit prohibitions or the preventive service requirements and will fail to satisfy market reforms. Practically speaking, these arrangements are prohibited regardless of how they are structured.
In addition to penalties for non-compliance with employer shared responsibility rules, the ACA has introduced a multitude of new fees that employers must pay. These dollar amounts change annually, as does the percentage amount used to calculate affordability in relation to the ACA. Download UBA’s “Reference Chart on ACA Fees and Penalties” for information on the applicable 2015 and 2016 percentages and dollar amounts to help employers understand the indexed penalty and updated fee amounts.