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Individual Coverage funding by employer with HSA


Guest Brentwds
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Guest Brentwds

Hi, i need some help. I have a client that wants to setup a HDHP with an HSA as opposed to being on the employer group plan. The employer is ok with this and wants to fund up to what it would cost to cover her faimly on the group plan. What is the legal and best way to accomplish this goal. I have been told that it isn't legal for the employer to pay for an individual hdhp premium. Is there any other option besides just raiseing the employee's salary to compensate for the HDHP premium and HSA contribution ? I'm also concerned about how this applies to other employees who are on the group health plan. Is it ok to have one employee setup this way and the others stay on the group plan ?

thanks alot for your help.

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This may be a slippery slope that the employer may not want to go down. When you start to allow employees to opt out of group health plans, the integrity of the group starts to suffer. Remember, health plans require some kind of participation level of eligible employees. If the group falls below the participation levels it does run the risk of losing coverage all together. What if other healthy employees find out, cut the same deal, and then participation drops below. What you have is a sick group that cannot get coverage.

Editorial aside. You may want to get the company's financial people, or outside CPA, to make the decision on how to structure the contribution. It is usually better to give it in compensation, which may cause a tax event for the employee.

As a suggestion, is there anyway you can offer a variety of health plan options via the group plan? I am in California and many plans allow employers to select a variety of options (HMO, PPO, HSA, etc) to be offered to the employees. If this is the case, then the employer can avoid some headaches.

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If the employer makes a direct contribution to an employee's HSA, that employer has just made itself subject to the comparability rules under Section 223 (governing HSAs). Which means--now the employer must see that EVERY employee has an HSA, and make comparable contributions.

The only way to do it is to give the employee a raise and let him/her use that to fund the HSA. No tax advantage to the employer.

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In my opinion, this can be done with an individual policy, but not an HSA/HDHP, as stated already.

I believe it is okay from a federal standpoint, which would trump any state insurance law that says otherwise.

I am having this discussion presently with the CO Department of Insurance, which specifically prohibits this option.

I have sent them my "evidence."

They basically came back with, "This is what it says in our state law, and the legislators had legal advice before they passed it."

They basically don't care how it may conflict with federal law.

What state are you in, and how does their department of insurance deal with the issue?

Don Levit

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Just one other item about CO, and my opinion about federal law.

I don't mean to say that federal law trumps state law in every situation.

It should be decided on a case-by-case basis, according to federal law.

What CO has done is to say, categorically, that any time an employer pays for an individual policy, it is an ERISA plan, and, thus, subjects that individual policy to the small group regulations.

Don Levit

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  • 2 weeks later...

I agree with the CO Dept. of Insurance that the employer is sponsoring an ERISA plan, by paying for it. I don't know about the second part--"and thus, subjects that individual policy to the small group regulations". I assume that second part means "subjects that policy to the state's small group regulations."

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Jacmo:

Yes, I am assuming that if the employer paying the individual premium for the employee establishes an ERISA plan, then it would be subject to the small group laws.

Why do you think paying the premiums (and, that is all the employer does), establishes an ERISA plan?

Could the employer establish an ERISA plan by not paying the premium on an individual policy?

Don Levit

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If the employer makes a direct contribution to an employee's HSA, that employer has just made itself subject to the comparability rules under Section 223 (governing HSAs). Which means--now the employer must see that EVERY employee has an HSA, and make comparable contributions.

The only way to do it is to give the employee a raise and let him/her use that to fund the HSA. No tax advantage to the employer.

Jacmo--do you mean to say that the employer must see that every employee has an hsa, or that every employee is eligible for an hsa, and if elelects the hsa option, the employer could then contribute to the hsa.

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Don: "Could the employer establish an ERISA plan by not paying the premium on an individual policy?" Yes, it's possible. The most common scenario of this happening is when an employer takes an active part in communicating individual plan benefits, assisting with claims filings, etc. rather than simply providing the convenience of payroll deduction.

leevena: eligibility alone won't meet the comparability requirements. There must be comparable contributions.

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Don: "Could the employer establish an ERISA plan by not paying the premium on an individual policy?" Yes, it's possible. The most common scenario of this happening is when an employer takes an active part in communicating individual plan benefits, assisting with claims filings, etc. rather than simply providing the convenience of payroll deduction.

leevena: eligibility alone won't meet the comparability requirements. There must be comparable contributions.

Jacmo...so if I understand this correctly, a group of 10 offers health insurance to the employees, one selects an HSA, the other select non-HSA. If the employer offers a $500 per year hsa contribution, the other 9 employees in the non-hsa option also get the $500 per year?

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Jacmo:

Thanks for your reply.

You are correct that other elements go into whether or not an employer endorses a plan, in addition to paying premiums.

I assume you are referring to the 4 safe harbor factors, in which an employer must meet in order to not establish an ERISA plan.

Are you aware that just because the employer does not meet the safe harbor guidelines, does not mean that an ERISA plan has been conclusively established.

Federal courts have ruled on this issue, which means that even if the employer pays the premium on 2 or more individual policies, an ERISA plan has not necessarily been established or maintained by an employer.

Further investigation would need to be pursued to determine whether or not an ERISA plan exists.

Do you have any federal citations to back your opinion?

Don Levit

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Thanks, Don. No, I didn't know that. And I agree that you'd have to have the additional facts and circumstances.

Leevena: In your last post, you are now implying that there are 2 health options to choose from: One HSA compatible, the other non-HSA compatible. In that case, the employer does not have to make comparable contributions to participants in the non-HSA compatible health plan.

For all employees who are in HSA compatible HDHPs, the employer must make comparable contributions.

Exception to the comparability rule--an employer can make GREATER contributions to non-HCEs than to HCEs.

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