ACA Guidance: Employers Cannot Offer Cash in Lieu of Health Care Benefits

If your city is offering employees cash (even on an after-tax basis) to reimburse the purchase of an individual health insurance policy, this is no longer acceptable.
(Published Dec 8, 2014)

The U.S. Department of Labor (DOL) released new guidance on Nov. 6 on the Affordable Care Act (ACA) pertaining to employers reimbursing employees for individual health insurance plans, on either a pre-tax or after-tax basis. This new guidance will primarily affect cities that do not meet the definition of “large employer” under the ACA because large employers typically do not offer this type of arrangement.

If your city is offering employees cash (even on an after-tax basis) to reimburse the purchase of an individual health insurance policy, often called an employer payment plan, this is no longer acceptable under the ACA. The original September 2013 guidance states that an employer health plan that reimburses insurance premiums may not be integrated with an individual health insurance policy. The guidance further stated that employer payment plans cannot comply with the ACA’s prohibition against an annual dollar limit on essential health benefits because an employer payment plan by definition has an annual dollar limit—the amount of premiums reimbursed.

This means that no funding arrangement, including after-tax contributions to salary, would be allowable under health care reform regulations. Some employers used a health reimbursement arrangement (HRA) to reimburse individual health insurance premiums. These plans are no longer feasible based on the September 2013 guidance either.

The League encourages cities using this method to discontinue it as soon as possible, preferably for the entire 2014 calendar year, and if that is not possible, at least going back to Nov. 6, when these guidelines were first published. If neither of these options are possible (for example, due to union contract provisions), the city should put a new method in place by the beginning of 2015.

If your city has been using this method, you will probably want to take a step back and consider why you offer benefits to your employees in the first place. Usually employers offer benefits as a way to stay competitive in the marketplace when competing with other employers for the best talent. If that’s the case for your city, you should probably consider the following two options.

Option 1. The first option is to find a small group health insurance plan that meets your employees’ needs, and establish a consistent city contribution toward the cost of that insurance. There are many options for small groups such as the new MNsure health care exchange, the Public Employees Insurance Program (PEIP), various service cooperatives, or directly through a provider such as Medica, HealthPartners, PreferredOne, or Blue Cross/Blue Shield. It’s important to make the same contribution to all of your employees; however, you can vary the contribution by union groups and sometimes by other factors.

Option 2. The second option is for the city to discontinue health insurance contributions but make changes to its employee compensation plan to ensure that the city is still competitive with other employers. This can take on various forms such as increasing wages or offering other benefits such as dental insurance. Any option should ideally be reviewed and approved by the city attorney, given the recent DOL guidance, and the fact that all guidance may be open to interpretation.

If your city is struggling with understanding your options, or if you have other questions regarding this issue, please feel free to contact the League’s HR Department at In addition, your city may want to consider using the free half-hour of consultation with Gallagher Benefits that is being subsidized by the League of Minnesota Cities and is free as part of your League membership.

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