Health Insurance Option: Funding Employees’ Individual Plans
If your city is considering funding its employees’ individual health insurance policies, it’s important to understand the legal implications. (Published Nov 15, 2012)
As we all prepare for new requirements under the federal Patient Protection and Affordable Care Act (PPACA), some cities are considering eliminating their group health plan and instead setting up a method to fund individual policies. There are two basic options by which an employer may fund the purchase of individual policies. However, there are many considerations to review with each option.
The League has worked with Hitesman & Wold, P.A., to outline considerations with both options for cities. Cities that are considering either of these options should work with a benefits attorney or a brokerage firm with substantial knowledge about all of the Internal Revenue Code (IRC) requirements, the Health Insurance Portability and Accountability Act (HIPAA) rules associated with each option, and other applicable restrictions.
Section 125 cafeteria plan An employer can work with its existing Section 125 cafeteria plan by adding an employer contribution. The contribution can be made in the form of flex credits that may be used for any benefit offered under the cafeteria plan, including individual policy premiums, health flexible spending account (FSA), dependent care FSA, etc., or the contribution can be made solely to the individual premium payment feature offered under the cafeteria plan. (Note that the health FSA and the individual premium payment feature are two distinct benefits.)
Issues to consider with this type of arrangement include:
Insurance coverage obtained through the exchange (in 2014) cannot be paid through a cafeteria plan unless the employer offers employees the opportunity to enroll through an exchange in a qualified health plan in a group market.
The irrevocable election rule for cafeteria plan elections still applies, which may limit the employee’s ability to make changes to the amount he or she is paying through the plan during the middle of the plan year.
The employer can offer a cash-out option (a/k/a “cash in lieu”) for all or a portion of the employer contribution that is not allocated to other benefits; but this is not required. (Note, however, that if no cash-out option is available, other portions of the cafeteria plan may be negatively impacted. Employer contributions not available in cash that can be allocated to a health FSA may prevent the health FSA from being an excepted benefit under HIPAA. This creates some additional compliance requirements with respect to the health FSA.)
If the cost of the employee’s coverage exceeds the employer’s contribution, the employee can make pre-tax contributions to the plan through salary reduction to pay the additional premiums.
Premiums must be substantiated in accordance with the cafeteria plan rules. Some employers handle this on their own while some rely on a third-party administrator (TPA). In general, benefits can be provided by reimbursing employees or by directly paying the insurance carrier.
The status of the individual premium payment feature and the individual policies purchased through that arrangement under HIPAA is unclear. Although the IRS has informally indicated that the arrangement constitutes a group health plan, which would make it subject to HIPAA’s portability requirements, we are not aware that the IRS has taken any enforcement action against employers that sponsor these types of arrangements. For instance, if the arrangement is a group health plan, the fact that insurance carriers currently (until 2014) use individual underwriting to determine eligibility and premiums could violate HIPAA’s nondiscrimination requirements. Nevertheless, we are not aware of any enforcement action with respect to this issue. (Note that beginning in 2014, there can be no pre-existing condition limitations placed on any coverage and all coverage must generally comply with guaranteed issue requirements.)
The status of the arrangement under PPACA is unclear because the regulatory agencies have not yet issued any guidance regarding this type of arrangement. For instance, if the employer is a large employer subject to the play or pay requirements under PPACA, it is unclear whether the arrangement will qualify as employer-provided minimum essential coverage. If the arrangement does not constitute minimum essential coverage, the employer could be subject to the penalties for failing to offer coverage to its full-time employees. It is also unclear whether the employer might be responsible for paying various fees (e.g., Patient Centered Outcome Research [pcor] fees) and providing various notices (e.g., Summary of Benefits and Coverage) and reports (e.g., W-2 reporting) with respect to the arrangement.
HRA The second approach is to set up a health reimbursement arrangement (HRA). Unlike health FSAs offered through a cafeteria plan, HRAs can reimburse insurance premiums. Remember: HRAs are funded solely by the employer.
Issues to consider with this option include:
Insurance coverage obtained through the exchange (in 2014) can be reimbursed under an HRA.
The HRA can, by design, reimburse other out-of-pocket medical expenses if the entire employer contribution is not used for premiums, but the employer can design the HRA to reimburse only premiums.
No cash-out option is available. Unused contributions can be carried over to future plan years or can be forfeited.
If the cost of the employee’s coverage exceeds the employer’s contribution (i.e., the employee’s HRA account balance), the ability to pay the additional premiums with pre-tax dollars is more complicated. It is currently possible to pay the coverage through a separate cafeteria plan, but some coordination is required to ensure the plans are in compliance.
Premiums must be substantiated in accordance with the HRA rules. Some employers handle this on their own while some rely on a TPA. Benefits can be provided by reimbursing employees or by directly paying the insurance carrier.
The status of the individual policies purchased through the HRA under HIPAA is unclear. Some have argued the policies themselves (not only the HRA) constitute a group plan. If that is the case, the same HIPAA compliance issue discussed above for the individual premium payment feature of a cafeteria plan is also an issue here.
HRAs are subject to certain provisions under the PPACA that can be problematic, such as the prohibition on annual limits. If the HRA reimburses other expenses in addition to insurance premiums, the HRA may find itself in technical violation of the prohibition on annual limits under PPACA.
HRAs are, in most cases, subject to certain provisions under the PPACA that increase the cost of providing the benefit (e.g., PCOR fees) and that increase administrative responsibilities (e.g., various notice and reporting requirements).
If the employer is a large employer subject to the play or pay requirements under PPACA, it is unclear whether the HRA will qualify as employer-provided minimum essential coverage. It appears, based upon the language in the statute, that an HRA should qualify as minimum essential coverage but the IRS has not yet provided guidance on this issue. If the HRA does not constitute minimum essential coverage, the employer could be subject to the penalties for failing to offer coverage to its full-time employees.
Uninsurable individuals Regardless of which of these two methods is pursued, cities should keep in mind they may run into situations where employees are not able to obtain coverage on the individual market. Until 2014, health insurance carriers still underwrite individual policies and can determine if an individual is uninsurable. Those uninsurable employees would be eligible for coverage under a group plan if the city offered it, but as an individual plan it may be very difficult to find coverage. The Minnesota Comprehensive Health Association plan is one option for uninsurable individuals in Minnesota, but that plan doesn’t offer enrollees much choice and can be expensive.
If a city has applicants declining job offers and/or employees seeking employment elsewhere because they are struggling to obtain health insurance on the private market, this can have obvious impacts to a city’s recruitment and retention strategies.