Can Employers Reimburse Employees for Individual Coverage?
Employers who reimburse employees for individual non-group health plans face a $100 a day or $36,500 per year, per employee excise tax. This rule applies to all employers, but the fine itself is only levied on those who have to comply with ObamaCare’s mandate (firms with 50 or more full-time equivalent employees). The enforcement of the fee was put off in most cases, but it was kicked into full gear starting July 1, 2015.
- Employers with over 50 FTE need to offer a group plan.
- Employers with less than 2 employees can offer whatever they want. However, offering an HRA seems to count as minimum essential coverage (and thus it can’t be paired with premium tax credits or other marketplace assistance; an HRA can be paired with a marketplace plan, but not with marketplace assistance; learn more).
- Employers with less than 50 FTE should look into group plans first, but can consider an HRP (which is like an HRA with special rules; and i’m not sure if it can be paired with tax credits; learn more about HRPs).
IMPORTANT UPDATE: Since this article was written a fix for small business HRAs was put in place via the 21st Century Cures Act of 2016 under President Obama. As of March 13, 2017 employers began to be able to offer Small Business HRAs called Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). These are Affordable Care Act-compliant health coverage plans for businesses with fewer than 50 full-time-equivalent (FTE) employees. Learn more about QSEHRAs.
TIP: Nothing on this page should be taken as legal or tax advice. There are some rather large fees for getting it wrong, so take that into account. We suggest seeking professional advice before making a health reimbursement choice. When in doubt, try ObamaCare’s SHOP.
On Section 105 Plans?
Saying there has been confusion over employers reimbursing individual health plans is an understatement. After a lot of searching and some great feedback… we have two conflicting schools of thought on section 105 plans. We will present them both and then a conclusion, but first, to make things simple (ish):
According to cbiz.com’s 2015 article IRS Grants Penalty Relief, Issues Guidance on Medical Reimbursement Plans (article) – Certain types of medical reimbursement plans are exempt from the §4980D penalty, including:
- Ancillary benefit plans – plans that only cover ancillary benefits such as dental, vision, long-term care and disability coverage, which are not considered part of essential health benefits;
- Integrated Section 105 plans – plans that are coordinated with insurance coverage, so that the combined arrangement provides an ACA-compliant group health plan;
- Retiree-only plans – medical reimbursement plans covering only retired employees; and
- One-employee plans – medical reimbursement plans that only cover one employee (must comply with Section 105 nondiscrimination rules).
If you want another take on this see: Risking a Health Insurance Strategy the I.R.S. May Not Approve by the NYTimes.
Where the two schools agree: “To comply with the mandate employers must offer a group health plan”, employers can’t reimburse individual coverage with a section 105 HRA. See the few exceptions to the HRA rule here.
Beyond this there are two schools of thought on what kinds of section 105 plan choices employers have.
School 1) ZaneBenefits suggests a section 105 “Healthcare Reimbursement Plan” (HRP). An HRP is a certain type of section 105 plan that doesn’t count as offering health insurance, but is tax deductible for an employer, and tax-exempt for the employee. It can be used to distribute funds to an employee on a monthly basis for health expenses, up to a limit set by the employer. It won’t satisfy market reforms, but also don’t incur the excise tax as it doesn’t break the DOL compliancy rules that the HRA breaks. There is a “use-it-or-lose-it” rule. There is a bit more to it. In general, the plan is structured to meet all requirements set forth by the PPACA, but doesn’t satisfy the employer mandate for 50 or more FTE.
School 2) As a reader put it: “The IRS has repeatedly stated that employers are prohibited from reimbursing employees for individual health premiums, period, They restated it again in Q&A 2 at https://www.irs.gov/pub/irs-drop/n-15-87.pdf An HRA is a 105 plan.
I don’t know what it will take to stop a couple of vendors from promoting this. And, I see you are referring to them for this solution. Calling it a 105 vs a 125 is NOT a work around. Please read Q3 at http://www.dol.gov/ebsa/faqs/faq-aca22.html that specifically mentions 105.
Every major law firm (Alston & Bird, Leavitt and others) that have address this issue have been clear that reimbursement by employers of individual premiums is clearly prohibited, with fines of $100/ee/day. Please, you are putting a lot of small employers at risk based on the opinion of marketers that are unwilling or unable to provide a legal opinion to back their “workaround.”
Our conclusion: School 2 is a misunderstanding of the nuances of how plans can be structured for businesses and the implications of the new PPACA related legislation. Employers should go with a group health plan in most instances, but for those that this doesn’t make sense for an HRP or even HRA could be the way to go. However, Zane’s section 105 alternative HRP can be a smart workaround for those who don’t have to comply with the mandate and don’t want to offer a group plan. This is even more true after the 2016 issued IRS Notice 2015-87 (plain english explainer here). You can get the ZaneBenefits explainer on this here.
Ultimately, after working with ZaneBenefits to ensure we understood their workaround, we feel it makes a good alternative assuming care is taken to structure the plan correctly. Feel free to comment below with questions.
FACT: Small employers will likely benefit the most from offering a SHOP group health plan as tax credits are offered for up to 50% of an employee’s premium based on FTEs and income.
Can an Employer Reimburse an Employee for an Individual Health Plan as Health Coverage?
No, an employer must offer a group health plan to “offer health coverage”. If an employer who has to comply with the mandate tries to reimburse an employee for individual coverage they face a $100 a day or $36,500 per year, per employee fine. The caveat is small employers are exempt from the fee and those who don’t need to offer coverage can offer a “Healthcare Reimbursement Plan” (HRP) instead.
Health care arrangement’s set up under a section 105 reimbursement plan can’t reimburse health insurance premiums for private plans purchased by the employee. Details on the rule and the fine can be found here 26 U.S. Code § 4980D – Failure to meet certain group health plan requirements.
Summary of Fee for Reimbursing Employees for Individual Non-Group Coverage
Now that we know employers can’t reimburse non-group plans lets take a closer look at why so this can all make sense. Here is a quick breakdown of what you need to know:
Employers Should Offer Group Health Plans, Small Employer Can Use the SHOP
The ACA was written to have employers offer group health plans. There is a Marketplace called the SHOP for smaller employers to get cost assistance and buy fairly priced group plans.
Larger employers, who have traditionally paid less for coverage for group plans don’t get to use the SHOP, but they are required to offer coverage to full-time employees or pay a fee. The requirement to offer coverage is called the employer mandate.
An Employer With 1 Employee is Exempt
A small employer is an employer with 2 or more, but less than 50 full-time employees.
According to 26 U.S. Code § 4980D: For purposes of paragraph (1), the term “small employer” means, with respect to a calendar year and a plan year, an employer who employed an average of at least 2 but not more than 50 employees on business days during the preceding calendar year and who employs at least 2 employees on the first day of the plan year. For purposes of the preceding sentence, all persons treated as a single employer under subsection (b), (c), (m), or (o) of section414 shall be treated as one employer.
The Law Wasn’t Super Clear, But DOL and IRS Guidelines Are
Although the law wasn’t super clear about this, later clarification from the IRS and Department of Labor (DOL) clarified that employers couldn’t reimburse employees for individual health plans as Health Reimbursement Arrangements (HRAs) or employer payment plans. Remember this is mainly talking about offering HRAs as coverage for employers who have to comply with the mandate. It’s not talking about all reimbursement options outside of “offering health insurance”.
The Rule Deters “Double Dipping”
The rule was meant to avoid employers getting tax benefits via the HRA while at the same time the employee was using ObamaCare’s subsidized Marketplace’s. That would be “double dipping” (getting double tax benefits on the same dollar. In this case once for employer tax breaks and once from employee getting Premium tax credits and/or out-of-pocket cost assistance).
The Fee Enforces the Rule
To ensure the rule is followed and to prevent employers and employees from “double dipping” and skirting the mandate through the use of Marketplace subsidies and HRAs a large excise tax was enacted for non-compliance.
Luckily There are Exemptions
There are a fair amount of exemptions for business size, not realizing you weren’t supposed to do this, etc, etc. So generally a business won’t get a fee, but will rather get a warning and will have 30 days to fix their ways. Also, as mentioned small businesses have more options than large businesses.
Even Small Employers Need to Offer Group Plans (Although Small Employers are Exempt from the Fine)
Employers who want to offer health insurance or need to under the law should offer group health plans. Reimbursing a non-group plan won’t qualify for tax benefits and may result in a hefty fee.
The Fee Goes into Effect July 1st, 2015
The fee went into effect July 1st, 2015. Make sure you are in compliance with the new rules ASAP.
The Bottom Line
If you are an employer, you should offer your employees a group plan. You can always make any arrangement you want with an employee, but you won’t be able to get tax benefits for offering healthcare if an employee gets non-group coverage. If you are a large employer, you could face the full fee and no exemption if you reimburse employees for non-group coverage.
You can read more about employer health care arrangements here. We go into more detail on reimbursement practices, the fee, and how to avoid it.