Premium Reimbursement for Public Exchanges Not Permitted, DOL Confirms

Despite multiple agency pronouncements, some vendors still convinced unknowing employers otherwise

By Stephen Miller, CEBS November 12, 2014

updated on Dec. 13, 2016

Update: Small Employers Permitted to Use Stand-Alone HRAs

Enactment of the 21st Century Cures Act in December 2016 allowed small businesses to use health reimbursement arrangements (HRAs) not linked to a group health plan to fund employees purchasing individual plans on the open market. See the SHRM Online article "New Law Lets Small Employers Use Stand-Alone Health Reimbursement Arrangements."

In an online posting, the Department of Labor (DOL) reiterated that employers may not use a health reimbursement arrangement (HRA) or other payment plans to reimburse employees for purchasing nongroup health insurance coverage, including policies available on an Affordable Care Act (ACA) public exchange.

Among the points addressed by the DOL in a set of Frequently Asked Questions posted on Nov. 6, 2014, were the following:

Question: My employer offers employees cash to reimburse the purchase of an individual market policy. Does this arrangement comply with the [ACA] market reforms?

Answer:No. 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. …

Question: My employer offers employees with high claims risk a choice between enrollment in its standard group health plan or cash. Does this comply with the [ACA] market reforms?

Answer:No. … such arrangements will violate the nondiscrimination provisions, regardless of whether (1) the cash payment is treated by the employer as pre-tax or post-tax to the employee, (2) the employer is involved in the selection or purchase of any individual market product, or (3) the employee obtains any individual health insurance. …

A Clear Prohibition

“This really shouldn’t be that difficult,” Gary Kushner, president of benefits advisory Kushner & Co., and Ben Cohen, the firm’s practice leader for health and welfare benefits, commented in a blog post.

“Nevertheless, in the face of multiple pronouncements from [federal agencies] implementing provisions of the ACA … some vendors still convinced unknowing employers that it was fine for them to continue or start that practice, and now even make it seem a win-win for both the employer (tax deductions, lower payroll taxes) and employee (premium tax subsidies at the Exchange, pre-tax income). Only one small catch: the ACA’s infamous general penalty section, IRC 4980D.”

As Kushner and Cohen point out, Internal Revenue Code Section 4980D, added under the ACA, imposes penalties of $100 per employee/per day on employers offering insurance that fails to meet certain group health plan requirements. The federal agencies overseeing the ACA had previously issued guidance in this area, including a DOL Technical Release, an IRS Notice, and two separate IRS FAQs.

“While the logic of using an HRA to reimburse employees for purchasing coverage on the [ACA] Marketplace may make some sense,” Kushner and Cohen added, the new guidance “once again confirms that it is not an allowable practice and subjects the employer to significant penalties.”

Private Exchange Alternative

Kushner and Cohen added, however, that providing employees with subsidized access to ACA-compliant group coverage through a private health care exchange is an allowable alternative.

Also, for employers not subject to the ACA’s coverage mandate penalties (generally those with fewer than 50 full-time employees or equivalents), or willing to pay those penalties, “an employer is allowed to offer taxable cash to all eligible employees, whether they use it to purchase health coverage or not. For example, an employer could tell all eligible employees that they’re discontinuing group health coverage and increasing all eligible employees’ pay by $X per month, which could be used to purchase individual coverage at the Exchange. However, offering that $X per month only to those who buy coverage would be prohibited,” they noted.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related SHRM Articles:​

IRS Prohibits Payment Plans for Premiums, SHRM Online Legal Issues, May 2014

Regs Limit Use of HRAs for Exchange-Purchased Coverage, SHRM Online Benefits, January 2013 (subsequently updated)

Related External Articles:

Large Penalties Await Employers Who Reimbursed Certain Employee Health Insurance Premiums in 2014, Forbes, January 2014

Chart of Disallowed Pay or Play Tactics, E Is for ERISA blog, December 2014

Labor and Treasury Departments Play Whack-A-Mole with Employer Payment Plans, Mintz Levin, November 2014


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