HRA Account Help Needed

[Guest lmccormick]

Believe me..I've tried to understand all of this. I'm going to explain what we'd like to do and how I understand it and please tell me if it's doable. I'm still confused as to whether or not it is permissible to offer different accounts to different employees or if they must all be the same.

Small employer will have a dozen or so employees working overseas and plans to give each one an HRA with $5,000 in it to be used for privately obtained medical and dental insurance premiums and out of pocket expenses. Let's call this HRA #1.

Same employer has several current employees that he offers an HRA to for expenses only, $1,000 per year and they can accumulate and rollover up to $2,500. HRA #2.

Same employer will be hiring several new domestic employees and would like to reimburse them for up to $4,500 per year for privately obtained medical/dental insurance premiums only (no carryover provision)....must provide insurance receipts, etc....As I understand it he does not need to have a plan document for this nor does he have to offer it to every employee either the old ones or the newly hired ones.

Same employer would also like to offer HRA #2 (to cover the out of pocket expense above and beyond the premiums) to the select new employees he's providing the premium reimbursement funds for.

Is all this legal and proper? Is there something I'm not understanding correctly?

I know this has likely been addressed before but it's very confusing.

Lisa

[oriecat]

On what basis would employees get assigned to each HRA plan?

[vebaguru]

Assuming that they pass the nondiscrimination tests of section 105(h), this is ok. However, the plan documents must track what is actually being done. Oriecat asks a good question: I sugget that the answer might be that the participants are named in the documents (or on an attachment to the plan documents).

[Guest lmccormick]

Well the employees in HRA#1 (which includes the ability to be reimbursed for private medical/dental insurance premiums and expenses up to $5,000 per year- no carry-over) would all be hired after a certain "date" and be working out of the country for 60 days or longer.

The employees covered under HRA#2 are all domestically based employees (plan covers only expenses(not-premiums) and it does carry-over from year to year.

The third item (not a written plan because it's for premium reibursement only and as I understand it that is covered under section 106 so doesn't require a plan and it allows you to discrimate who you'll offer it to)........is for those who have negotiated it as a condition of their employment. Actually, the amount being offered is the same across the board but is only being offered to employees hired after a certain date. Thus, if it was put into an official plan it could be called HRA#3, would cover domestically based employees hired after a certain date, and it does not allow carry-overs.

From what I've been able to decipher you have to meet the discrimination rules if you allow carry-overs and the only one that does allow carry-overs is HRA#2 and that would be given to everyone who is domestically based, old and new.

Gosh, this is a bit confusing but I think we're OK. I very much appreciate your feedback and opinions.

Lisa

[KJohnson]

I assume that in the third situation the employees will not get the cash if they do not use up the entire $4,500.

If these employees are being reimbursed for major medical insurance (as opposed to "excepted benefits" like dental or vision) you could have some real issues related to HIPAA. There are unresolved questions as to whether the insurance they are purchasing constitutes a plan of the employer. By its very nature insurance purchased on the "open market" will be discriminatory based on health status--a HIPAA violation if this is considered an "employer plan". Also if it is an emlpooyer plan you could have COBRA compliance issues. I know that the EBIA manual recommends against reimbursing for premiums for major medical coverage because of the HIPAA concerns.

[Guest lmccormick]

That is NOT the way I understand it at all. In fact I though it was specifically permitted to pay for an employees individually obtained health insurance!

What am I missing here?

I thought Rev. Rule 61-146 pretty much explains that this is permitted. This falls under section 106 and is not subject to discrimination testing or am I misreading this?

Lisa

P.S. How large of a company must you be for COBRA/HIPAA to apply anyway? This would not be an employer plan but simply a reimbursement to the employee for their privately obtained health insurance. In fact I don't believe a plan document is even required.

[KJohnson]

61-146 resolves a host of tax issues assuming you don't have the option between taxable (like cash) and non-taxable benefits.

If an employee is receiving benefits on a non-taxable basis and the employer is deducting the premiums reimbursed it would seem to have at least some of the indicia of an employer sponsored plan. HIPAA is generally applicable if you have 2 or more active employees (HIPAA's privacy provisions have different rules) and COBRA is generally 20 employees on a typical business day. There are nuances to these rules

HIPAA discrmination, certificates of creditable coverage and special enrollment issues are unresolved in this area. As I mentioned there is an issue regarding COBRA. Also, you may not need a document for purposes of 61-146 but do you have a welfare plan under ERISA which would required a plan document, SPD etc?

Resolving the tax issues is only one step.

[Guest lmccormick]

>>Resolving the tax issues is only one step. <<

Apparantly not! LOL!

It would seem as though I need some training in the HIPAA/ERISA departments. All these conflicting rules/requirements are entirely confusing. It's easy to understand why small employers tend to not want to mess with benefits of any type. Oh well, we'll just keep plugging away in good faith.

It wouldn't seem as though the HIPAA discrimination stuff would apply being as we are not offering the insurance...just the reimbursement for those who have individual plans. I feel confident that as long as we treat all employees the same there shouldn't be an issue and if there is, oh well.

[Don Levit]

As I understand the revenue ruling in 1961, which is still very applicable today, the employer can take a deduction as a legitimate business expense for medical insurance premiums. If the policy is initiated while an employee of this particular employer, it is NOT an ERISA plan, generally, if the plan is not endorsed by the employer. Paying premiums would be one factor in the endorsement process. However, because the employer is reimbursing the employee (with proper verification), and not the insurer, this payment should not be a problem.

This would be even more pertinent, if the employer had no impact on the selection of a particular policy.

I don't see how discrimination plays into this at all, even though one must be very healthy to get the policy initially.

How could this be discrimination, particularly if the policy was purchased before coming to the employer?

Whether the employee is reimbursed or not, is strictly part of the negotiation process of being hired.

I guess you could label it discrimination that some employees have their premiums reimbursed, and others do not (although not accurate legally).

You could stretch this to a ridiculous extent to say that reimbursements for dissimilar premiums, or reimbursements for single v. family coverage is discriminatory.

If the employer decided to cancel all group insurance, and provide reimbursements for individual plans, would this be prohibited?

Don Levit

[KJohnson]

I agree that the 1961 Rev. Rul is still applicable and is still good law. Of course it has nothing to do with ERISA.

What you have is an employer paid benefit welfare benefit. The employer is taking a deduction for the coverage and the employee is receivng the amounts pre-tax. I think it would be difficult to exclude this under the DOL's regulatory definition of a welfare plan. However, I agree that this is an unsettled area. Once it is an ERISA welfare plan providing medical benefits (and not "excpeted benefits") COBRA and HIPAA kick in. For one COBRA case on individual policies see:

Stange v. Plaza Excavating, Inc., 2001 U.S. Dist. LEXIS 1190 (N.D. Ill. 2001)]

It would be discriminatory under HIPAA because two different people with different health status would have to pay different premium amounts for the same policy.

Again, the EBIA manual and other treatises urge caution in providing non-excepted benefits in this fashion because of the COBRA/HIPAA and ERISA issues--statutes that were not even in existence when the 1961 Rev. Rul. came out.

[mbozek]

I am not sure what the regulatory issues are if the policy is owned by the employee and the employer reimburses the employee for the premium as permitted under RR 61-146. The employer does not select the ins policy or make it part of the er's plan. The ER is not paying the insurer for the policy. This arrangment is not subject to ERISA under the DOL reg for group ins. because the er is not collecting premiums from the employee for the policy through payroll deduction. Its no different than the payment of cash to the employee which is excluded from the employee's taxable income under the IRC.

[KJohnson]

I don't see how this can be anything other than an employer "program" established to provide employees with medical benefits. If an employer gave some employees in $4,000 taxable income and said go out and buy your own health insurance or buy a car, I don't care which-- I agree you would not have an ERISA plan.

However, that is not what you have here. The employer has set aside $4,000 explicity for medical insurance. Not for other purposes. The employer presumably will review the invoices to determine that the amounts have actually been paid and that they are for health insurance. If they are not, the employee is not reimbursed. This arrangement. has a level of employer involvment and approval tha takes you into the ERISA arena. This is the employer's program for providing certain employees with health benefits.

Also, the employer is not treating this as cash compensation but as a non-taxable "health plan" benefit to the employee under Code Sections 105 and 106.

Section 105 is entitled "Amounts received under accident and health plans " Section 106 is entitled "Contributions by employer to accident and health plans" Section 106 provides and exclusion for amounts contributed for "employer-provided coverage under an accident or health plan."

So you would be telling the IRS it is employer provided coverage and employer contribuiton under a health plan and telling DOL it is not. I agree there are times when you can argue that terms have different meanings under the Code and ERISA. I am not sure that you would get that far with arguing that you have a "plan" for purposes of 106 and 106 and not one for ERISA.

[Don Levit]

Actually, I was thinking of the employee paying premiums after tax, and being reimbursed by the employer.

Yes, the employer gets a deduction, but that would be based on the revenue ruling from 1961, in my opinion.

The employee would not report the reimbursement as income, because the premium was paid with after tax money.

However, let us assume that the individual policy is an ERISA plan. As you know, group plan sponsors can have individual and/or group plans.

Why would HIPAA and COBRA be applicable to a guaranteed renewable individual policy?

You are correct that group plans can not discriminate based on health, but individual plans CAN do so.

By its very nature, individual plans will have different premiums for applicants with different health histories.

This seems like a catch-22.

By the way, I am reading the book by Joseph Heller.

Any critiques out there on the book?

Don Levit

[mbozek]

The ER is not selecting the policy nor paying the insurer- the employee has the sole relationship and control with the insurance carrier, including the right to terminate the policy. All the er does is pay cash to the employee. In Stange v. Plaza Excavating the court noted that the mere purchase of insurance by the employer was insufficient to establish a plan under ERISA. "When the employer leaves the procuring of the insurance entirely to the employee the plan is truly an individual plan and falls outside ERISA."

[Don Levit]

This is a bit off of the subject, but is getting a lot of discussion on a "competing" chat forum.

We are discussing minimum participation requirements for group insurance.

In Florida, apparently 2 well known insurers do not consider existing individual policies as eligible to participate. In other words, the employees would have to drop their coverage, or the entire group would not meet the 75% minimum participation requirements.

Any one out there familiar with thus insurer provision?

Don Levit

[KJohnson]

I did find a case that supported MBOZEk's point" New England Mut. Life Ins. Co. v. Baig , 166 F.3d 1 (1 st Cir. 1999) where the individual already "had" the policy and the employer agreed to reimburse him for it as part of an employment agreement. The Court said it was not an ERISA plan. Maybe it will work. The cases don't discuss the notion of this reimbursement arrangment being considered an employer provided arrangement and "plan" under 105 and 106 of the Code and the reimbursements being considered "contributions" to the "plan" for this purpose. I also wonder whether, to the extent that a DC health arrangments are used as an "end run" around HIPAA's discrmination provistions, certificates of creditable coverage, COBRA etc. DOL or others would "sit still" for this. EBIA and others say "don't do it" because of COBRA and HIPAA concerns. Contrary arguments can be made.

As to Don's point, I guess you are talking about HIPAA small market reform and whether a small market carrier can impose minimum pariticipation standards. I know NC's law states:

In applying minimum participation requirements to a small employer, a small employer carrier shall not consider employees or dependents who have qualifying existing coverage in determining whether an applicable participation level is met. "Qualifying existing coverage" means benefits or coverage provided under: (i) Medicare, Medicaid, and other government funded programs; or (ii) an employer-based health insurance or health benefit arrangement, including a self-insured plan, that provides benefits similar to or in excess of benefits provided under the basic health care plan.

I guess you are back to looking at whether this is "employer based" which is essentially the ERISA/COBRA question. If it is not employer based then these employees would "count against you" in determining mimimum participaton. If it is employer based then they could not "penalize" you for employees selecting these individual policies.

[Don Levit]

Thanks for providing that provision from the NC code.

It doesn't specifically exclude individual policies either from the participation requirements.

Although a bit biased, I don't see what the problem would be if the individual plan (non employer sponsored) was at least equal to the basic benefits plan.

I am not asking the question about individual policies as an end run around any legislation. I pose the question as a way to provide for more permanent coverage through an individually owned plan.

Don Levit

[KJohnson]

Don,

You also might be interested in the following. The first is CMS's guidance on the numerator and denominator for any participation rule. As they note, states can adopt their own rules on how they determine the denominator either as all eligible employees or a subset of eligible employees. That is because the smaller the denominator the easier it is to pass the participation test. I would suspect the question in FLA is whether employees with individual plans are included or excluded under that States definition of the denominator. It appears that FLA could, however, clearly include them in the denominator if it wanted to.

http://www.cms.hhs.gov/hipaa/hipaa1/content/HIP00-5.asp

The second is CMS opining on when a plan marketed as an individual plan will acutally be considered a group plan mandating its guranteed availability and guranteed renewability to all small market employers. They essentially adopt a test as to whether it is considered a welfare plan under ERISA.

http://www.cms.hhs.gov/hipaa/hipaa1/content/hip00-6.asp?

[Don Levit]

Those 2 links were very helpful. Thanks for providing them.

Some excerpts from link number one:

The statute GROUP participation rules does not require that all eligible individuals or employees of an employer be counted in the denominator. If a participation rule does not count all the employees (both insured and uninsured), then a much smaller number of the uninsured GROUP must participate.

Example #2: Company A has 5 employees. All 5 are eligible to participate, but 3 have declined, because they have other GROUP coverage. The 75% minimum participation rule is not met by enrolling 2 employees, because only 40% (2 of 5) participate.

The issuer may decline to issue SMALL GROUP market coverage to the employer.

Issuers are allowed to include individuals who have other coverage within the total number of elgible individuals. We do not believe that the definition of a participation rule in section 2711(e) of the PHS Act precludes an issuer from including individuals with other coverage in the denominator of the minimum participation calculation. Thus, a state law which permits the inclusion of such individuals is not preempted.

To be continued with excerpts from the second link.

Don Levit

[Don Levit]

Excerpts from link #2:

Health insurance that is an INDIVIDUAL policy under state law MAY be subject to the PHS Act, IF the coverage is provided in connection with a GROUP HEALTH PLAN.

An INDIVIDUAL insurance policy state law does not prevent it from being characterized as SMALL GROUP COVERAGE for purposes of Title 27. A GROUP HEALTH PLAN is determined upon the facts surrounding the employer's involvement.

So, my question is, if the employee has an individual policy which is not provided in connection with a group plan, it does not appear to be subject to the PHS Act. If so, the individual policy does not seem to be characterized as small group coverage.

If that is true, how could the issuer require the employee's individual policy to be included in the group participation rule, if it is not a group policy?

Don Levit

[GBurns]

The state rules etc might require that it be treated or characterized as a Group Plan.

This is even potentially more so if the employer falls under the state Small Group Health Plan rules. There are also state insurance rules regarding List Billing which might also be applicable.

[Don Levit]

GBurns brings up some additional areas that seem to cloud an already very murky subject. Let me throw out another situation.

Let's say that insurers can legally require all employees to be eligible, regardless if they have individual or group policies. What is preventing insurers from honoring those prior coverages, and offering plans for lesser benefits, which, at least, attempt to provide "full" coverage between the 2 plans?

Don Levit

[GBurns]

I don't think that there is anything that prevents the insurer from giving coverage, but coverage is not the issue. The issues are taxation of premium, taxation of benefits, eligibility, mandate and regulation (these 3 mainly from state small group laws etc) and EEOC and state labor and civil rights laws.

[mbozek]

How do state labor and civil rights laws affect the plans since state laws are preempted by ERISA (outside of state laws regulating the insurance policy)? Employer provided insurance benefits are not taxed under the IRC.

[GBurns]

Check your state small group health plan laws. They determine whether it is employer provided, the mandated coverage and the premium payment structure etc.

Under the IRC employer provided benefits have to meet various criteria in order to be not taxable. Fail and the benefits are taxable. What do you think happens to the tax benefits in a disallowed plan?