Paying Employees to Buy Health Coverage? Know the Ground Rules
Does your company’s health insurance plan include health reimbursement arrangements (HRAs) or flexible spending accounts (FSAs)? If so, you should know these plan components are both subject to the Affordable Care Act (ACA) and its “market reform” provisions. The Department of Labor and other principal agencies have issued another round of guidance1 to answer some of the frequently asked questions about health care reform, including questions about the use of HRAs and FSAs.
According to the new guidance, HRAs and FSAs are covered by the Affordable Care Act’s prohibition on annual benefit limits and are required to provide the same set of preventive health benefits as any other compliant health plan. The sticking point comes when you try to bolt HRA or FSA accounts onto an “individual market” policy. That cannot be done.
Heath Plan Defined
Whenever an employer “uses an arrangement that provides cash reimbursement for the purchase of an individual market policy 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,” it is a bona fide ERISA plan. According to the Labor Department, that means it is subject to the Affordable Care Act.
The guidance also tackled two other issues. One involves a product being sold to employers today with the claim that they can terminate their existing health plan and use this one instead. The “product” is a reimbursement plan “that works with health insurance brokers or agents to help employees select individual insurance policies, and allow eligible employees access to the premium tax credits” available to those who buy coverage through a public exchange.2
The Labor Department maintains such plans have two flaws. First, they fall under the definition of a health plan, and therefore are subject to ERISA and the ACA. “The mere fact that the employer does not get involved with an employee’s individual selection or purchase of an individual health insurance policy does not prevent the arrangement from being a group health plan,” the agency states.
To determine whether an unorthodox arrangement aimed at helping employees secure coverage is or is not an ERISA plan, the government weighs the facts and circumstances of the case. Variables include the employer’s “involvement in the overall scheme,” and “the absence of an unfettered right by the employee to receive the employer contributions in cash.”
The second and lethal strike against this health benefit arrangement, according to the Labor Department, is that it “cannot be integrated with individual market policies to satisfy the market reforms.”
Finally, the Labor Department’s third area of guidance involves plans in which employers seek to facilitate special independent arrangements for “high claims risk” employees. Specifically, some employers have sought to separate high-risk employees from their covered health benefit pool by offering them enough money to buy a policy on their own, such as through a state-run high-risk pool plan. They use the example of offering an additional $10,000 to high-risk employees. The example also assumes that the contribution toward standard coverage for each other employee is $2,500.
Limits of “Benign Discrimination”
The reason employers may have believed such arrangements would have passed muster is that the law does permit plans to contain “more favorable rules for eligibility or reduced premiums or contributions based on an adverse health factor.” That is known as “benign discrimination.”
Such favorable discrimination has been approved for plans that allow an employee with a disabled dependent child to maintain dependent coverage for that child at an age beyond that permitted for non-disabled children. Another example of permissible favorable discrimination is absolving disabled employees of any responsibility to share in the cost of their health benefits.
But benign discrimination doesn’t fly in what the Labor Department calls “cash or coverage” arrangements. One reason for this is … high-risk employees who decline the cash option are considered to be discriminated against unfavorably because they pay more than other employees. By the Labor Department’s logic, that’s due to the fact that employees in this group each make the same $2,500 contribution to the standard plan as all other employees, but have an added $10,000 opportunity cost by foregoing the cash option. “The effective required contribution by that high-claim-risk employee for plan coverage is $12,500,” the Labor Department reasons.
The Department of Labor also states that its statutory authority to regulate benign discrimination is limited to the kind that is designed within the terms of the health plan itself, but not in cases that fall beyond the internal rules of the standard health plan, such as “cash or coverage” arrangements.
1Part XXII of “FAQs about Affordable Care Act Implementation.”
2Based on Internal Revenue Code (IRC) Section 105