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December 16, 2014

Guidance on Reimbursing Individual Health Insurance Premiums and Offering High-Risk Employees a Choice Between Enrollment and Cash

This Capital Checkup summarizes recent guidance from the Departments of Treasury, Labor, and Health and Human Services, which are responsible for implementing the Affordable Care Act1 (collectively, the “Departments”), on the following practices:

The Departments issued this guidance in the form of answers to frequently asked questions (FAQs).2

Premium-Reimbursement Arrangements

Starting in 2013, the Departments have released several answers to FAQs addressing certain reimbursement arrangements through which employers reimburse employees for medical expenses and/or health premiums.3 In the view of the Departments, stand-alone health reimbursement arrangements (i.e., those not paired with an underlying group health plan) violate various market-reform provisions under the Affordable Care Act, including the prohibition on annual dollar limits.4 Arrangements that reimburse employees for the cost of individual health insurance policies also violate the market-reform provisions.

A recent answer to an FAQ5 reinforces earlier guidance and states that any arrangement through which an employer pays for an employee’s individual health insurance policy or reimburses an employee for the cost of such an individual policy is prohibited. This is the case even if the employer treats the payment or reimbursement as taxable income to the employee. The rationale is that such an arrangement is a group health plan that violates the market-reform provisions of the Affordable Care Act. Violations of these market reforms can trigger penalties of up to $100 per day for each affected individual.

Although not addressed in the latest guidance, stand-alone reimbursement arrangements, as well as arrangements that reimburse individual insurance premiums, are permissible in the context of a separate retiree-only plan.

Offering a Choice of Enrollment in Group Coverage or Cash to Employees with High Claims Risk

Many employers offer cash to employees who opt out of group health care coverage. However, another recent answer to an FAQ6 states that employers may not offer this choice only to employees with high medical claims risk. Doing so would violate longstanding rules under the Health Insurance Portability and Accountability Act (HIPAA) prohibiting discrimination on the basis of health status. The Departments state that 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.

In some circumstances, it is acceptable to provide more favorable treatment based on a health factor, a practice known as benign discrimination. For example, some plans allow disabled dependents to remain covered past age 26. However, the Departments state that offering cash in lieu of coverage only to employees with high medical claims risk is not a permissible form of benign discrimination under the HIPAA rules. In the Departments’ view, the offer actually places such individuals at a disadvantage because only they must give up cash compensation in order to enroll in the employer’s plan. As the Departments previously have not set out clear rules on what constitutes permissible benign discrimination, the answer to the FAQ states that the Departments intend to clarify these rules in future rulemaking.

Implications for Employers

Employers offering these types of arrangements or contemplating them should review the guidance carefully to ensure that their offerings are consistent with the guidance.

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As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their legal counsel for authoritative advice on the interpretation and application of the Affordable Care Act and related guidance, including the guidance summarized in this Capital Checkup. Sibson Consulting can be retained to work with plan sponsors and their attorneys on compliance issues.


1 The Affordable Care Act is the shorthand name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-48, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup.)

2 This answer to an FAQ is available on the Department of Labor website. (Return to the Capital Checkup.)

3 See, for example, Sibson Consulting’s October 10, 2013 Capital Checkup, “New Guidance Requires Immediate Action by Employers that Sponsor Health Reimbursement Arrangements.” (Return to the Capital Checkup.)

4 Health Savings Accounts are generally not group health plans and are not subject to these market reforms. (Return to the Capital Checkup.)

5 This is the answer to Q1. The link to this FAQ and the answer is in note 2. (Return to the Capital Checkup.)

6 This is the answer to Q2. The link to this FAQ and the answer is in note 2. (Return to the Capital Checkup.)