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Is reimbursing employees’ individual health insurance premiums a group health plan?


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A small employer, in seeking to facilitate health insurance coverage for some of its employees, found that pricing for individual health insurance contracts is more favorable than any group (or association-sponsored) contract. The amount that the employer is willing to pay toward some employees’ health coverage is enough to reimburse 100% of the premium under the insurance contract that each employee selected. This would not involve a § 125 election, because there is no choice to get cash wages or any other taxable benefit. Assume that those entitled to reimbursement, as a subset of the employer’s employees, would meet IRC §§ 105&106 nondiscrimination rules.

If the ONLY thing that an employer does is reimburse a substantiated health insurance premium [Revenue Ruling 61-46, 1961-2 C.B. 25] and the employer carefully avoids any ‘involvement’ regarding the individual insurance contracts, does such an employer “maintain” a group health plan?

If so, is that ‘plan’ governed by ERISA?

If there is an ERISA-governed plan, is it also governed by HIPAA?

(COBRA is a non-issue because there are only a few employees.)

Being able to arrange this so that it’s not a plan (while still getting ‘health’ treatment for Federal income and FICA taxes) really matters because the employer won’t do anything that requires it to administer a plan.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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In ERISA Adivosry Opinion 96-12A, the Labor department advised that a cafeteria plan was not an ERISA-governed plan. The key to the Opinion's analysis is that the cafeteria plan itself does not provide any welfare benefit. The paragraph below quotes the Opinion's analysis but replaces each reference to "Group Health Plan" with "individual health insurance contracts".

"[T]he function of the Pre-Tax Plan is to provide a method by which employees may receive tax-favored treatment of contributions that are in any case required under [each individual health insurance contract]. The provision of this tax-favored treatment, however, is not the equivalent of the provision of a benefit enumerated under section 3(1), and it does not appear that the Pre-Tax Plan itself provides any enumerated benefit. It is therefore the position of the Department that the Pre-Tax Plan, as currently structured, does not constitute, in itself, a separate employee welfare benefit plan within the meaning of section 3(1)."

I recognize that this is selective quotation because the Labor department also said that the arrangement for making contributions tax-favored was somehow "part of" the group health plan. Even if that "part of" idea made some sense concerning the Topco Associates, Inc. Group Health Plan mentioned in the Opinion, it's hard to see how an employer's payment of an amount to its employee is "part of" an individual health insurance contract - a contract that by its law and terms can have only the insurer and the individual as parties.

BenefitsLink mavens, do you think that there is a good argument that: (1) Only each individual insurance contract provides a health benefit of a kind described in ERISA's definition of a welfare plan. (2) The employer's willingness to reimburse its employee's substantiated premium payment provides only money and tax treatment, not any health benefit. (3) Each individual insurance contract is not established or maintained by an employer. Rather, each insurance contract is established and maintained by its two parties - the insurer and the individual, neither of which is the individual's employer.

Or what should make me nervous about this argument?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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The employer"s group health plan is "go out and find individual policies and the employer will pay or reimburse premiums up to $xxx." The more detail the worse, such as different amounts for nonemployee coverage and different eligibility. The idea of what is a "plan" is shifting and seems to going away from finding a plan, especially in the severance pay arena. Your position is not beyond question.

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You should take a look at the DOL opinion letter concluding that a dependent care reimbursement plan was not an ERISA welfare plan. I don't remember it too well, but the DOL's reasoning in that case may be helpful in this case.

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Different results in different cases....

O’Leary v. Provident Life & Accident Ins. Co., 456 F. Supp. 2d 285 (D. Mass. 2006) (individual disability insurance policy

with employer-paid premiums was an ERISA plan); Heidelberg v. Nat’l Found. Life Ins. Co., 25 EBC 1536 (E.D. La. 2000).

New England Mut. Life Ins. Co., Inc., v. Baig, 166 F.3d 1, 22 EBC 2623 (1st Cir. 1999).See Roehrs v. Minn. Life Ins. Co., 37 EBC 2700 (D. Ariz. 2006). See also McCall v. Focus Worldwide Television Network, Inc., 46 EBC 2019 (E.D. La. 2009) (unique employment agreement providing for bare purchase of insurance policy for one employee did not demonstrate requisite employer intent to establish ERISA plan).

There is this also on HIPAA

https://www.cms.gov/HealthInsReformforConsu...HIPAA-00-06.pdf

Finally look at 106(a) of the Code "(a) General rule Except as otherwise provided in this section, gross income of an employee does not include employer-provided coverage under an accident or health plan. "

I think you are saying it is employer provided for 106 but is not employer provided for ERISA.

I agree this is an area where there is not a lot of clarity.

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QDROphile, jpod, and KJohnson, thank you for the good help.

After reading the cases you mentioned (and many others), I'm ready to advise my pro bono client that the uncertainty can't be cured - in either direction. (Even obtaining an ERISA Advisory Opinion wouldn't be a conclusion, because a court need not follow it.)

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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  • 1 month later...
Guest lmccormick

We ran into this same problem and for a solution just reimbursed for individual premiums on a taxable basis. It was better than nothing and seemed to avoid all the issues related to doing it pretax.

Lisa

quote name='Fiduciary Guidance Counsel' date='Feb 25 2012, 02:46 PM' post='219497']

QDROphile, jpod, and KJohnson, thank you for the good help.

After reading the cases you mentioned (and many others), I'm ready to advise my pro bono client that the uncertainty can't be cured - in either direction. (Even obtaining an ERISA Advisory Opinion wouldn't be a conclusion, because a court need not follow it.)

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You can add this to the mix of uncertainty...

http://www.ebia.com/WeeklyArchives/CourtCases/20842

/2012: Cafeteria Plan Premium Payment Did Not Take Insurance Arrangement Out of ERISA's Voluntary Plan Safe Harbor (Thomson Reuters/EBIA)

"Other courts have concluded that payment of voluntary plan premiums through a cafeteria plan weighs against the safe harbor, even if not a deciding factor on its own.... In contrast, this and another recent decision ... seem to suggest that cafeteria plan use alone might not rule out the safe harbor. Nonetheless, employers considering using a cafeteria plan to collect voluntary plan premiums should proceed with caution, looking closely at other indicia of involvement and appropriately limiting their actions if the arrangement is intended to fall outside of ERISA."

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  • 1 year later...

I'm not sure pre-tax, post-tax matters for the ERISA analysis. I think the only way to get around ERISA would be the voluntary plan exception and if you have an employer contribution of any sort that means you can't meet the exception. What is below was prior to the ACA guidance on reimbursing individual premiums through an HRA, but back in 2008 at the ABA JCEB conference DOL indicated that it thought the individual policies were part of a plan for ERISA and gave a bit of a non-answer for HIPAA purposes. The HIPAA concern on the individual policies goes away at least to some extent because of the mandated changes in underwriting for individual policies. Also, 2013-54 and the corresponding DOL Technical Release mention the voluntary plan exception to ERISA as being not an "employer payment plan." Would any other-- even post-tax--- arrangement that did not meet the voluntary plan exception still be considered an employer payment plan under the guidance?

12. An employer sponsors Health Reimbursement Arrangements (HRA) for their employees. (Assume the HRA is subject to ERISA and is in compliance with all applicable requirements). The employer permits employees to pay for all qualified medical expenses including individual health insurance premiums through the HRA. The only health insurance option available to employees is to purchase individual polices using the HRA funds. Because the individual insurance polices are reimbursed through the HRA (which is funded with employer contributions) would the individual policies constitute a group health plan subject to ERISA and if so, would such policies (which are underwritten individually based on health factors) potentially violate HIPAA nondiscrimination provisions with respect to a group health plan?

Proposed

Answer 12: Likely yes, the individual policies would constitute a group welfare plan subject to ERISA and the additional group health plan provisions under Part 7 including HIPAA nondiscrimination. Employer contributions are used to pay for the individual insurance policies. Generally the employer’s payment of insurance premiums to provide ERISA benefits to employees will be enough to create an ERISA plan. There may be an exception to ERISA if the plan satisfies the voluntary safe harbor under 2510.3-1(j) – however the presence of employer contributions would negate the availability of the safe harbor. Because HRA dollars are employer contributions, the safe harbor would not be available in this scenario. It would appear that individual policies paid through employer HRA contributions would constitute an ERISA plan. Further, the preamble to the Final HIPAA portability regulations addressed this issue. Coverage provided by an employer through two or more individual policies may be considered a group health plan subject to HIPAA nondiscrimination rules. Preamble to Final HIPAA Portability Regulations 68 Fed. Reg. 78719 , 78733 (Dec. 20, 2004). The preamble further states “one significant factor in establishing whether there is a group health plan is the extent to which the employer makes contributions to health insurance premiums”. Id. Therefore it would be likely that using HRA dollars to pay for individual health insurance premiums would cause

the individual policies to constitute a group health plan. If the individual policies constitute a group health plan under ERISA and are subject to HIPAA, it is likely that the plan would not comply with HIPAA’s nondiscrimination requirements. Individual policies general establish eligibility and premium amounts based specifically on the health factors of the individual. Therefore a group health plan made up of individual policies would appear to violate the requirements of the HIPAA

nondiscrimination rules.

DoL

Answer 12: The Staff agrees that a Health Reimbursement Arrangement (HRA) is a group health plan generally subject to ERISA requirements. The Staff

also agrees that individual policies purchased with HRA funds would not meet the voluntary safe harbor under 29 CFR section 2510.3-1(j) due to the presence of employer contributions. Moreover, HIPAA’s nondiscrimination requirements appear in ERISA, the Code, and the Public Health Service Act. The term “group health plan” is defined differently in ERISA and the Code (the PHS Act follows the ERISA definition). As such, the applicability of the HIPAA nondiscrimination

requirements to individual insurance policies funded through an HRA would need to be resolved jointly by DoL, Treasury/IRS, and HHS. The DoL has not addressed the application of the nondiscrimination requirements under HIPAA, including the extent to which underwritten individual health insurance policies purchased and reimbursed by an HRA are treated as health insurance coverage offered under a group health plan. See IRS Notice 2002-45.

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If an employer abandons any attempt to avoid ERISA but would do what the IRS now calls an employer-payment plan is the employer's payment excluded from its employee's wages? Even if one accepts the premise that "the plan" (whatever it might be) somehow violates Public Health Service Act section 2711(a) [42 U.S.C. 300gg-11], how exactly does that failure cause the employee to lose the tax treatment recognized by Revenue Ruling 61-46?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Back of envelope: $100/day x 30 days/month = $3000/month, assuming a 7.65% tax burden, you'd have to be reimbursing ~$40K per individual per month for the employer tax savings to outweigh the penalty (anyone find glaring flaw in my rough calc?)

I suspect no one really examines the tax treatment issue since they get stuck at the penalty.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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  • 3 weeks later...

I think PHSA 2711 effectively says "no more pre-tax treatment of individual premiums". But you could still pay for individual premiums post tax by saying "all FT employees will get a $200 raise & we are dissolving the health plan". That is not a group health plan anymore. And how would the IRS / DOL determine what is employer money & what is not employer money?

KJohnson, why do you think that DOL's HIPAA non-discrimination is a factor? The premiums are not based on health status in any way.

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I indicated that I thought the HIPAA discrimination concerns that existed for reimbursing individual policies prior to 2014 did "go away". I hedged because I know that tobacco is still counted for individual policies and thought that tobacco use premium variance not geared to a wellness program could still violate HPAA discrimination if the individual policies were considered an employer plan.

I agree pre-tax is out because of the 2111 penalty. It will be interesting to see what "flavors" of post-tax treatment are allowed outside of the voluntary plan exception to ERISA (which is very difficult to meet).

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Ok, guess I didn't read your post closely enough. Thanks.

I ran across this a situation with a client. We dissolved the group plan a few years ago, but this year, there was an employee who was not subsidy eligible. Their accountant told them that the company could still pay for the premiums on a pre-tax basis and send the premium check directly to the insurance company. I disagreed with him since IRS notice 2013-54 defined "employer payment plan" as a group health plan. The accountant never got back to me. when I brought this up.

Anyway, it does raise the question: how does the IRS know what is employer money & what is employee money? The pre-tax treatment under 125 is still alive from what I understand. If the employer "raises wages" *wink wink*... then the employee uses those increased wages towards health insurance on a pre-tax basis via 125... how do you police that?! Which is what I suppose the accountant is thinking, or he'd just a bad accountant.

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Which is what I suppose the accountant is thinking, or he'd just a bad accountant.

I suspect that this is such a specific nuance of the health reform that most accountants aren't aware of it yet.

Seems to me that anyone who likes writing articles could sell one on the topic to any number of accounting (and other professional) magazines right now.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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  • 3 months later...
Here's a good summary on the changes to reimbursing individual health insurance premiums with an HRA or Section 105 plan.


On September 13, 2013, the Department of Labor issued Technical Release 2013-03 which modifies existing annual limit regulations as they pertain to stand-alone health reimbursement arrangements (HRAs) for plan years starting on or after January 1st, 2014. The changes present both good news and bad news.


The bad news... Under the interim final rules for the PHS Act Section 2711 annual limit requirements, a flexible spending arrangement as defined in IRC Section 106©2 is exempted. Many sponsors of stand-alone HRAs have been using this exemption to ensure their plan complies with the PHS Act Section 2711 annual limit and PHS Act Section 2713 preventative care requirements.


As part of the Technical Release, Health and Human Services (HHS) has reversed its position that flexible spending arrangements as defined above are exempted from the 2711 annual limit requirements.


According to the Technical Release, this change goes into effect for plan years beginning on and after January 1, 2014. In other words, the section 106©2 flexible spending arrangement exemption will still be available for plans with plan years beginning before January 1, 2014. This gives ample time for existing sponsors of stand-alone HRAs to ensure compliance.


The good news... Employers can still reimburse employees for individual health insurance premiums.


For the first time, the Department of Labor, the Department of Treasury, and Health and Human Services have coordinated to issue formal confirmation that employers are 100% allowed to reimburse individual health insurance premiums tax-free under the tax code. This is a MAJOR positive.


We repeat - employers are still allowed to reimburse employees tax-free for individual health insurance premiums.


What is the solution for plan years beginning on or after January 1st, 2014?


For plan years beginning on or after January 1st, 2014, one solution is to adopt a limited Healthcare Reimbursement Plan (HRP).


The HRP is structured to only reimburse:


- Health insurance premiums up to a specified monthly healthcare allowance,


- Preventative care as required by PHS Act Section 2713 at 100% without cost-sharing.


This structure ensures the HRP complies with the PHS Act 2711 annual limit requirements and the PHS Act 2713 preventative care requirements as outlined in the Technical Release.


Additionally, care must be taken in the design and administration of the HRP to ensure the plan does not meet the definition of an eligible employer-sponsored plan in IRC Section 5000A and consequently qualify as minimum essential coverage. This ensures employees participating in the HRP are able to receive a tax subsidy via the new health insurance marketplaces assuming they meet additional eligibility criteria.



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- Preventative care as required by PHS Act Section 2713 at 100% without cost-sharing.

Supposing for a moment that it was a valid plan design, this particular element is a deal breaker to me. It's glossed over in other articles on that website ("simply limit plan participation to people w/ proof of insurance which means preventive care will be covered by that plan instead"), but here's your all too realistic scenario: EE takes cheapest insurance, Insurance has a limited network and restricts (legally) preventive care to network providers only, EE prefers his own provider so EE gets out of network preventive care, Plan and Company are now on the hook for entire cost of preventive care which could quickly outweigh the Company's savings on payroll taxes.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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- Preventative care as required by PHS Act Section 2713 at 100% without cost-sharing.

Supposing for a moment that it was a valid plan design, this particular element is a deal breaker to me. It's glossed over in other articles on that website ("simply limit plan participation to people w/ proof of insurance which means preventive care will be covered by that plan instead"), but here's your all too realistic scenario: EE takes cheapest insurance, Insurance has a limited network and restricts (legally) preventive care to network providers only, EE prefers his own provider so EE gets out of network preventive care, Plan and Company are now on the hook for entire cost of preventive care which could quickly outweigh the Company's savings on payroll taxes.

No point in beating up that website. That website is just flat out wrong. I mean, completely wrong...not even hitting any part of the target. Whoever, interpreted the law for them that way needs a timeout. That's gross negligence or outright incompetence. It makes us all look bad. The IRS goes out of its way to say premiums are "after tax".

IRS Notice 2013-54:

B. Employer Payment Plans
Revenue Ruling 61-146 holds that if an employer reimburses an employee’s
substantiated premiums for non-employer sponsored hospital and medical insurance,
the payments are excluded from the employee’s gross income under Code § 106. This
exclusion also applies if the employer pays the premiums directly to the insurance
company. An employer payment plan, as the term is used in this notice, does not
include an employer-sponsored arrangement under which an employee may choose
either cash or an after-tax amount to be applied toward health coverage. Individual
employers may establish payroll practices of forwarding post-tax employee wages to a
health insurance issuer at the direction of an employee without establishing a group
health plan, if the standards of the DOL’s regulation at 29 C.F.R. §2510.3-1(j) are met.
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