aca

By Brian R. Carnie

Many employers in the past have offered employees cash to reimburse the purchase of an individual policy from a private insurance carrier or on the Marketplace (aka the Exchange) or for other substantiated medical expenses in place of employer sponsored group health coverage.  However, the federal government has recently taken the position that such an arrangement is itself a group health plan, and as such, it is subject to the market reform provisions of the Affordable Care Act (“ACA”) applicable to group health plans.  According to the IRS, DOL, and HHS, employer payment plan arrangements described above fail to satisfy (1) the ACA’s prohibition against annual limits on the dollar amount of essential health benefits covered under the plan and (2) the ACA’s requirement that non-grandfathered plans cover certain preventative services without imposing any cost sharing.  The market reforms apply to any group health plan offered by an employer, meaning the ACA market reforms apply to employer payment plans by small, non-ALE employers.  It does not matter whether the employer treats the money as pre-tax or post-tax to the employee.

Arrangements that fail to satisfy the ACA market reforms may be subject the employer to a $100/day excise tax per applicable employee (up to $36,500 per year per employee).  If the employer is an applicable large employer under the ACA, this excise tax is in addition to any “pay or play” penalties that could be imposed for not offering employer sponsored group health coverage that provides minimum value and which is affordable.  Small group employers (those having less than 50 full-time/full-time equivalent employees) have until June 30, 2015 to bring their arrangements into compliance without having to self-report these issues and pay the excise tax penalties.

Notwithstanding the above, an employer could avoid these excise tax penalties by offering compensation increases to employees.  The compensation increase cannot be conditioned on the employee using the additional cash to purchase individual health insurance.  IRS Notice 2015-17 confirms that an employer’s increase of an employee’s compensation to assist the employee in purchasing health coverage in the individual market will not be considered an employer payment plan subject to the ACA market reforms as long as the increase is not conditioned on purchasing health coverage and the employer does not otherwise endorse a particular policy, form, or issuer of health insurance.

IRS Notice 2015-17 also confirms that an employer payment plan offered to only a single participant who is a current employee (i.e., a “one-employee health plan”) is exempt from the ACA market reforms and thus is not subject to the excise taxes imposed under the ACA.  However, depending on the reason for such a plan, such an arrangement might violate HIPAA’s prohibition against discrimination based on health status (e.g., it is offered to a high-claims employee to encourage them to opt out of employer-sponsored group health coverage).