Agencies Slam the Door on Pre-Tax Payments for Individual Health Insurance

Many employers are concerned that the “market reforms” included in the Affordable Care Act (“ACA”) will lead to an unacceptable increase in the cost of providing health coverage to their employees. In response, some employers have considered moving to an “account balance” approach. They would simply deposit pre-tax dollars into an account (such as a health reimbursement arrangement, or “HRA”) that each employee could then use to purchase individual health insurance. However, in coordinated guidance issued on September 13, 2013, the three agencies charged with implementing the ACA have slammed the door on this approach.

Use of an HRA with Individual Insurance

According to the agencies, using an HRA in this fashion would run afoul of two different ACA market reforms: (1) a prohibition on imposing annual or lifetime limits on coverage of essential health benefits, and (2) a mandate to provide first-dollar coverage for a long list of preventive-care services. Although HRAs are generally subject to these ACA requirements, an HRA of this type cannot comply with either of them. That’s because the maximum annual reimbursement from the HRA would be capped at an employee’s annual insurance premiums, and those premiums would not constitute preventive care.

As explained below, this guidance allows an HRA to be “integrated” with group health coverage that itself satisfies these market reforms, thereby allowing the HRA to comply with the reforms. To this extent, the guidance simply clarifies preliminary guidance offered in Round # 11 of the Frequently Asked Questions concerning the ACA (as summarized in our January 28, 2013, article). However, the agencies have now made crystal clear that an HRA may never be integrated with an employee’s individual policy.

Other Pre-Tax Premiums for Individual Insurance

As if this were not enough, the guidance goes beyond HRAs. It applies to any pre-tax payment of premiums for an employee’s individual health insurance. This includes employee pre-tax premiums that are paid through a cafeteria plan (which are pre-tax only because they are treated as employer payments). Many employers have been offering this option under their cafeteria plans for a number of years.

As a result of this latest guidance, employers that have been helping their employees purchase individual health insurance on a pre-tax basis will have to discontinue that practice by the end of 2013. Otherwise, they will face the ACA’s penalty of $100 per day for each employee who is allowed to continue purchasing individual insurance on a pre-tax basis.

Retiree-Only Plans

Because retiree-only health plans are exempt from the ACA’s market reforms, an employer may continue to make pre-tax contributions to an HRA on behalf of its retirees ‒ even if those retirees may then use those amounts to purchase individual health insurance. The same is true for an employer’s pre-tax reimbursement of premiums paid by their retirees (or the direct payment of premiums on their behalf).

Note, however, that such an arrangement will constitute “minimum essential coverage.” As a result, any retiree who benefits under such an arrangement will be precluded from obtaining a federal subsidy to help pay the premiums for coverage obtained on a public health insurance Exchange.

After-Tax Premium Subsidies

The guidance does confirm that employers may provide after-tax subsidies to their employees for the purchase of individual health insurance. They may also facilitate an employee’s payment of individual health insurance premiums via payroll deduction, so long as that is done on an after-tax basis.

The key here is to preclude “double-dipping.” That is, an employee may not receive the benefit of both pre-tax premium payments and the federal premium subsidy.

Integration with Group Health Coverage

The guidance describes circumstances under which an HRA (or other pre-tax employer premium subsidy) will be deemed to be integrated with group health coverage. Such an “integrated HRA” will not violate the ACA’s market reforms ‒ so long as the associated group coverage complies with those reforms.

The group coverage with which an employee’s HRA is integrated need not even be sponsored by the employee’s employer. For instance, it might be a health plan sponsored by the employer of an employee’s spouse. In that situation, the guidance allows an HRA sponsor to rely on its employee’s representations as to his or her coverage under the other group plan.

Somewhat different integration rules apply to group coverage that satisfies the ACA’s 60% “minimum value” standard and coverage that does not. In essence, an HRA linked to minimum-value coverage may allow for broader use of the dollars contributed to the HRA. An HRA linked to group coverage that fails to provide minimum value must be limited to the reimbursement of deductibles, copayments, coinsurance amounts, and medical care that is not an “essential health benefit.”

Under either type of integrated HRA, however, employees must be offered at least an annual opt-out election. Because the HRA would constitute “minimum essential coverage,” this requirement is designed to allow an employee to receive the federal premium subsidy to purchase coverage on an Exchange by opting out of the HRA.

HSAs and FSAs

Aside from HRAs, the two most common types of account-balance health plans are health savings accounts (“HSAs”) and health flexible spending accounts (“health FSAs”). Employers should not assume that either of these plans will serve as a vehicle for providing their employees with pre-tax dollars to be used to purchase individual health insurance.

HSAs are generally exempt from the ACA’s market reforms. On the other hand, subject to limited exceptions (for older retirees, unemployed individuals, and COBRA beneficiaries), amounts held in an HSA may not be used to pay premiums for health coverage. For that reason, an HSA is not a viable option for an employer’s pre-tax subsidy of its active employees’ health insurance premiums.

Regardless of whether a health FSA is subject to the ACA, it is flatly prohibited from reimbursing insurance premiums. That makes health FSAs an equally inappropriate vehicle for an employer’s pre-tax subsidy of its employees’ insurance premiums.

The recent guidance does confirm, however, that any health FSA constituting an “excepted benefit” is exempt from the ACA’s market reforms ‒ including the prohibition on annual or lifetime limits and the preventive-care mandate. To fall within this category, a health FSA must (1) be sponsored by an employer that offers other health coverage (that is not an excepted benefit), and (2) limit an employee’s total annual reimbursements to the greater of two times the amount of the employee’s salary-reduction contributions, or the employee’s salary-reduction contributions plus $500. Most health FSAs satisfy both of these conditions and thus are excepted benefits.

Employer Next Steps

As the clock ticks down to January 1, 2014, employers offering any type of account-balance health plan ‒ or reimbursing their employees for any health insurance premiums ‒ will want to review those arrangements to determine whether they are subject to the ACA and, if so, whether they comply with the market reforms. If they do not comply, prompt action should be taken to amend or terminate the arrangements, and to communicate the changes to employees.

It may even make sense to split a single plan into active-employee and retiree-only plans, thereby preserving greater flexibility with respect to retirees.

For assistance in analyzing any of these issues, please contact any member of Spencer Fane’s Employee Benefits Practice Group.