ACA FAQ 22: Employers Cannot Pay High-Risk Employees to Opt Out of Group Health Coverage & Cannot Reimburse for Individual Policies

Affordable Care Act FAQ Part 22  (issued November 6, 2014) specifies three approaches to offering health benefits that are not allowed under the ACA.   Q/As 1 & 3  reiterate prior guidance that prohibits employers from  reimbursing employees for purchasing individual health policies, and  Q/A 2 explains why employers cannot pay high claims risk employees to opt out of the employer’s group health plan and purchase individual coverage.

The FAQ is short (only 3 ½ pages) and easy to read.  This article  lists the specific questions, the (yes/no) answer for each, and  a short explanation of the reasons.  A longer explanation of the reason in Q/A 2 is provided since the Departments have not previously addressed this issue.  The Departments have previously addressed the issue of employer reimbursement for individual policies (Q/As 1 & 3), in DOL Technical Release 2013-03, available at http://www.dol.gov/ebsa/newsroom/tr13-03.html, and IRS Notice 2013-54, available at http://www.irs.gov/pub/irs-drop/n-13-54.pdf;  and IRS FAQ issued May 13, 2014,  at http://www.irs.gov/uac/Newsroom/Employer-Health-Care-Arrangements )

Question 1:

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

Answer: NO

Reason:  An arrangement under which an employer provides cash reimbursement to employees for the purchase of an individual market policy is group health coverage.  This is because it is a “plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees.”  This applies whether the employer treats the money as pre-tax or post-tax to the employee.  As noted in prior guidance, employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate the prohibition on annual limits (PHS Act section 2711)  and the requirement to provide certain preventive services without cost sharing (PHS Act 2713), among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code.

Question 2:

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 market reforms?

Answer: NO

Reason:  This constitutes prohibited discrimination based on one or more health factors.   This is prohibited under Public Health Service (PHS) Act section 2705,which was incorporated by reference into ERISA section 715 and Code section 9815, as well as the nondiscrimination provisions of ERISA section 702 and Code section 9802 originally added by the Health Insurance Portability and Accountability Act (HIPAA).

Although existing regulations implementing this nondiscrimination provision permit more favorable rules for eligibility or reduced premiums or contributions based on an adverse health factor (sometimes referred to as benign discrimination),  cash-or-coverage arrangements offered only to employees with a high claims risk are not permissible benign discrimination. Such an arrangement “effectively increases the premium or contribution the employer’s plan requires the employee to pay for coverage under the plan because, unlike other similarly situated individuals, the high-claims-risk employee must accept the cost of forgoing the cash in order to elect plan coverage. For example, if the employer’s group health plan requires all employees to pay $2,500 toward the cost of employee-only coverage under the plan, but the employer offers a high-claims-risk employee $10,000 in additional compensation if the employee declines the coverage, for purposes of discrimination analysis, the effective required contribution by that high-claims-risk employee for plan coverage is $12,500.”

Such an arrangement will violate the nondiscrimination provisions, regardless of whether (1) the employer pays the cash amount on a pre-tax or post-tax basis,  (2) the employer is involved in the selection or purchase of the individual health policy, or (3) the employee even buys an individual health insurance policy.

Question 3:

A vendor markets a product to employers claiming that employers can cancel their group policies, set up a Code section 105 reimbursement plan that works with health insurance brokers or agents to help employees select individual insurance policies, and allow eligible employees to access the premium tax credits for Marketplace coverage. Is this permissible?

Answer: NO

Reason:  Same reason as under Q/A 1 above.  The arrangements described in this Q3 are themselves group health plans, so they must comply with the ACA market reforms provisions, including the prohibition on annual limits (PHS Act section 2711)  and the requirement to provide certain preventive services without cost sharing (PHS Act 2713). Such employer health care arrangements cannot be integrated with individual market policies to meet these requirements. Employers who establish these arrangements may be subject to penalties such as excise taxes under section 4980D of the Code.