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Single Employee Loophole that allows tax-exempt premiums?


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I operate a non-profit corporation in Texas. We have a single full-time employee who has purchased his own health insurance policy for his family. I was told last month by a CPA at the Texas Ministry Conference that employers with 1 full-time employee do not have to include the amount of health insurance premiums paid as taxable wages. I cannot find anything online to corroborate that.

If the premium reimbursements are tax-exempt, are they exempt only from income tax or also from FICA tax?

Thanks for reading.

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It would be best to ask that CPA for proof of his position, in case you misunderstood or he misspoke.

I do not deal with small entities, but as far as I know, he is wrong.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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I believe there is an exception under Notice 2013-54, but I think it's only for the owner? Not sure.

One-employee plans

The requirement for unlimited covered benefits does not apply to one-employee medical reimbursement plans. Businesses that have only one employee may continue to offer this benefit. In a very small business in which a family member is the owner’s spouse, the medical reimbursement plan may cover the spouse and dependents of the employee, and thus include the business owner. In this manner, medical expenses, in addition to medical insurance, can be provided on a tax-deductible basis. But Section 105 plans must meet nondiscrimination rules, so these one-employee plans are only practical where there are no other regular employees in the family business.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070
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It is as it always was, the employee must be a bona-fide employee who may cover their spouse and dependents, including the owner. A self-employed person and a greater than 2% shareholder cannot be an employee.

Here is an explanation:

https://www.tasconline.com/products/bizplan/section-105-plan/

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Brett Ashley's query supposes that the employer is a not-for-profit corporation, and the context of the doubted information suggests that the not-for-profit might be a charitable organization.

Could the query be about whether an employer with fewer than two employees is a non-group?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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The query specified an individual health policy which would make the issue of "a non-group" moot.

There is no way, that I know of, to either reimburse an employee on a tax free basis or to not report the reimbursement as taxable wages. This used to be possible under Revenue Ruling 61-146 but is no longer the case as outlined in recent IRS Notice 2013-54 http://www.irs.gov/pub/irs-drop/n-13-54.pdf

If Brett does a search on Google using "IRS Notice 2013-54" he will see many items from many law firms and tax consultants explaining why it can no longer be done.

The IRS has further advised that some employers who violate this rule might be subject to large fines:

http://www.irs.gov/Affordable-Care-Act/Employer-Health-Care-Arrangements

http://www.swlaw.com/blog/employee-benefits/2014/06/11/the-irs-meant-what-it-said-in-notice-2013-54-employers-who-pay-for-individual-health-insurance-policies-for-employees-on-a-pre-tax-basis-face-massive-penalties/

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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  • 1 month later...

Brett,

The exemption is not based on employees, it is based on plan participants. First, you have to have a formal plan in place then yes, per DOL Technical Release 2013-03:

D. Affordable Care Act Guidance
1. Market Reforms – In General
The Affordable Care Act contains certain market reforms that apply to group health plans (the market reforms).(2) In accordance with Code § 9831(a)(2) and ERISA §732(a),the market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year..
The disbursement from the plan would be tax-free: income tax and payroll tax.

George Kelly

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@zbenefits

Note that "the market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year.." (emphasis mine)

Brett posted that the "employee who has purchased his own health insurance policy". This means that we are dealing with reimbursing and individual health insurance policy and not a group health plan. The exemption that you cited is not applicable. What is applicable and on point is the prohibition on "Employer Payment Plans".

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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GBurns,

Thank you for your response.

The term group health plan is an umbrella term, encompassing a number of different kinds of employer-provided benefit plans.

The term “group health plan” means an employee welfare benefit plan (as defined in section 3(1) of the Employee Retirement Income Security Act of 1974 [29 U.S.C. 1002 (1)]) to the extent that the plan provides medical care (as defined in paragraph (2)) and including items and services paid for as medical care) to employees or their dependents (as defined under the terms of the plan) directly or through insurance, reimbursement, or otherwise. (emphasis mine).

(42 U.S. Code § 300gg–91 - Definitions)

Here are a few examples of group health plans:
  • A group health insurance plan (defined below)
  • A self-insured health plan
  • A self-insured medical reimbursement plan (ex: Healthcare Reimbursement Plan or Section 105 Medical Reimbursement Plan)

A group health insurance plan ​(which I believe you are referring to) is a type of group health plan that provides actual health insurance coverage.

A group health insurance policy is purchased by an employer (or employee organization) and is offered to eligible participants, and to eligible dependents of participants.

This key distinction is one of the drivers behind the confusion over the ability of employers to reimburse employees tax-free for their individual health insurance premiums.

The prohibition on Employer Payment Plans (see IRS Notice 2015-17, et al.) does not prohibit employers from reimbursing employees for their individual health insurance premiums.

George Kelly

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Hello Flyboyjohn,

Thank you for the mention.

I recognize that there is an enormous amount of confusion surrounding reimbursement of employee's individual health insurance. I also recognize that there are many blogs/articles that conclude employers cannot reimburse employees for their individual health insurance.

In spite of the fact that the position advocated by @zbenefits is contrary to 100% of the articles/blogs issued by ERISA attorneys you have been able to find, it (the ability of employers to reimburse employees for their individual health insurance) is not contrary to the law.

The fact is that the tax code explicitly allows tax-free reimbursement of individual health insurance premiums.

George Kelly

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I would hesitate in relying on @zbenefits's position. One should review, among other things, DOL ACA FAQ XXII (emphasis added):

Q1: My employer offers employees cash to reimburse the purchase of an individual market policy. Does this arrangement comply with the market reforms?

No. If the employer uses an arrangement that provides cash reimbursement for the purchase of an individual market policy, the employer's payment arrangement is part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax to the employee. Therefore, the arrangement is group health plan coverage within the meaning of Code section 9832(a), Employee Retirement Income Security Act (ERISA) section 733(a) and PHS Act section 2791(a), and is subject to the market reform provisions of the Affordable Care Act applicable to group health plans. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code. Under the Departments' prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy.

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As a technical matter, you are correct that that there is nothing that states that an employer "may not" reimburse individual health policies. There are simply significant penalties if an employer does so. The same thing applies to most any other requirement under ERISA or the Code. For example, an employer can certainly decline to offer its employees COBRA continuation coverage. If it doesn't offer it, however, it is subject to penalties under ERISA and the Code.

I suspect that you are familiar with most if not all of the guidance out there so I will decline to recite the various Notices, etc. that have repeated stated the Departments' position. Is it your position that an employer can institute one of these programs and successfully overcome the inevitable DOL/HHS/Treasury Department challenge in court?

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Hello Chaz,

This is a great conversation, thank you for continuing to engage with me.

Absolutely, I am proposing that an employer can use a reimbursement plan that complies with the "market reforms" of the PPACA to reimburse employees for their individual health insurance premiums.

The preventive and annual limit rules do not affect the ability for a Section 105 medical reimbursement plan to reimburse individual health insurance premiums tax-free. Premium reimbursement is still allowed under the tax code via Section 105(b) (i.e. the definition of “medical care” in Section 213(d) still includes health insurance premiums).

A Healthcare Reimbursement Plan (HRP) is a Section 105 self-insured medical expense reimbursement plan structured to reimburse employees for:
  1. Health insurance premiums up to a specified monthly healthcare allowance, and
  2. Limited preventive care as required by PHS Act Section 2713.
To help limit the preventive care liability, an employer could require employees to show proof of having non-grandfathered minimum essential coverage to be eligible for the HRP.
PHS Act 2713 requires the HRP to cover basic preventive care services without cost-sharing. The HRP meets this requirement.
PHS Act 2711 states that no annual or lifetime limits may be placed on essential health benefits. As a result, the HRP may not place an annual limit on the basic preventive care expenses required by PHS Act 2713. Separately, PHS Act 2711 states that annual limits and lifetime limits may be placed on benefits that are not essential health benefits. Since health insurance premiums are not essential health benefits, the HRP may place a “premium-specific” annual limit on premium reimbursements.
We have recently published (Wiley, 2014) a book on this exact subject. If you want to message me your contact information and affiliation I would be happy to provide you with a complimentary copy.

George Kelly

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I've seen lots of discussions on this issue and it appears that Zane Benefits and TASC are the only two groups advocating this reimbursement program.

@zbenefits with all the discussions over the last year, is any other group or accounting firm or law firm agreeing with your position?

I'm all for fighting the IRS when they're wrong (like the safe harbor plan amendment prohibition debacle for example), but I'm cautious about recommending something to a client when the professional community is almost unanimously on the other side of the fence.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070
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After quite some consideration, I have to concede that @zbenefits is correct to some extent, He is correct regarding the exemption from ACA of a less than 2 participant plan. But, being exempt from ACA does not help because HIPAA, ERISA, state insurance law and the individual insurance contract prohibits the reimbursement of individual health insurance policy premiums, which is probably why there is the exemption cited by @zbenefits.

First, I must address some errors made by @zbenefits

1. While an HRA is a section 105 self-insured medical reimbursement plan, it is not the same as a standard 105 MERP and is also different from what he refers to as a Healthcare Reimbursement Plan, HRAs are explained by the IRS in Notice 2002-45 etc.

2. The reference in section 105(b) to section 213(d) is solely for the definition of "the expenses of medical care" and is not for the listing of the items which comprise such expenses. You will have to read a number of IRS Written Determinations etc to really understand IRS wording.

3. Your citing of 42 USC 300gg regarding "a group health plan" does not support your interpretation and subsequent comments, because it states:

(6) Employer
The term “employer” has the meaning given such term under section 3(5) of the Employee Retirement Income Security Act of 1974 [29 U.S.C. 1002 (5)], except that such term shall include only employers of two or more employees.

We are discussing a case with a single employee.

4. There is no explicit law that specifically allows the reimbursement of individual health insurance premiums.

Since we are discussing an employer with a single employee, most of the cites are irrelevant. What is more relevant than the tax issues are the issues of state insurance laws and the insurance contract, neither of which are pre-empted by ACA etc

Almost every Individual Application for Health Insurance has a certifying statement by the applicant that this is not an employer sponsored plan and that the premiums will not be reimbursed, directly or indirectly, through wage adjustment or otherwise.

Almost every state prohibits a small employer from reimbursing individual premiums by any means and also state that if any part of the arrangement is treated under section 106, section 125 or section 162, the entire arrangement falls under state small group heath insurance laws.

So regardless of Federal tax laws or ACA, the insurance policy and state law prohibits the reimbursement of individual health insurance premiums to employees.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Hello GBurns,

Thank you for your response. I appreciate the opportunity to discuss your points further. I will attempt to respond point by point:

1. The key element here is that all of the mentioned plans are Section 105 Plans. The most relevant distinction would be the difference between an HRA and an HRP:
A) HRAs are employer-funded, tax-advantaged employer health benefit plans used to reimburse employees for eligible medical expenses.
B) HRPs are employer-funded, tax-advantaged employer health benefit plans used to reimburse eligible employees for individual health insurance premiums and preventive care.

2. The reference in section 105(b) to section 213(d) establishes that (d)(1) The term “medical care” means amounts paid— (d) for insurance – are not included in gross pay.

3. I would argue that citation of 42 USC 300gg is supportive as the exception is determined by participants, regardless of the number of employees.

4. In 2002, the IRS published Notice 2002-45 that codified and spelled out the rules for employers to reimburse employees tax free for medical-care expenses and individual health insurance premiums via medical reimbursement plans referred to as HRAs, or health reimbursement arrangements.

As of today, May 8, 2015, Congress has not altered the United States tax code as it relates to tax-free reimbursements of individual health insurance premiums.
Self-employed persons receive a 100 percent tax deduction for their individual health insurance policy premiums, and employers are allowed to reimburse employees for the cost of their individual health insurance premiums tax free via a medical reimbursement plan under Section 105 of the Internal Revenue Code (Internal Revenue Code, 1954).
Regarding State Insurance Regulations:
HRPs are legal in all 50 states for employers of all sizes (as are all section 105 plans). This has been clarified with the release of numerous U.S. Treasury and State publications (see IRS Publication 502 and IRS Publication 969). HRPs are self-funded ERISA health and welfare benefit plans and are not subject to state insurance laws.
In the early 2000’s there was some state versus federal law controversy regarding an employer’s reimbursement of individual health insurance. Some state insurance departments argued that individual health insurance policies reimbursed by employers were effectively small group plans.
As of today, there has not been a single case where a state insurance department succeeded in getting an employer reimbursing an employee for an individual policy to be considered an employer-provided health insurance policy.
Mr. Burns, to quote your exact words from a comment posted 5/27/15 on Linkedin, Health Insurance Benefit Answers Group:
The section 105 plan does not fall subject to state insurance law, it causes the health insurance coverage to fall under stae small group laws etc.

George Kelly

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I've seen lots of discussions on this issue and it appears that Zane Benefits and TASC are the only two groups advocating this reimbursement program.

@zbenefits with all the discussions over the last year, is any other group or accounting firm or law firm agreeing with your position?

I'm all for fighting the IRS when they're wrong (like the safe harbor plan amendment prohibition debacle for example), but I'm cautious about recommending something to a client when the professional community is almost unanimously on the other side of the fence.

Bill,

I know of literally hundreds of CPA's and law firms using this type of reimbursement program. If you wish to connect outside of this forum we could discuss putting you in direct contact with some of these organizations.

George Kelly

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Mr. Burns, if I understand your position, you propose that the federal government wants to prohibit employers from providing employees assistance in purchasing individual health insurance policies. You believe (based on your interpretation of the law) that the government desires to limit small businesses to three choices: offer nothing, offer an employer sponsored group solution or, increase taxable wages to accommodate the purchase of individual policies.


I respectfully disagree. If I may be so bold as to interpret the law's spirit and intent, it is not to prohibit an employer's tax-free reimbursement of individual health insurance. Rather, it is to require that employees use those reimbursement dollars to purchase health insurance.


My personal opinion is that the government recognized that if it were to allow employers to reimburse employees for all medical expenses (as HRAs have done for decades) those employees would be less likely to purchase health insurance.


If an employer is able to offer an employee $2000, $3000...$4000 a year to reimburse for doctors visits, prescriptions..et al., would not that be a disincentive to purchase a major medical health insurance policy?


We all recognize that the PPACA only works if everyone purchases minimum essential coverage. Indeed, that is the purpose of the individual and employer mandates. I propose that the "market reforms" are a mechanism to ensure that the reimbursement dollars offered by employers are used by employees to purchase health insurance.

George Kelly

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@zbenefits

An HRP is the name given to a product being marketed by some entity. It has no legal standing in tax law. The term HRP does not appear anywhere in any IRS Publication.

An IRS Notice does not codify law, it is simply an advertisement of their stand on an issue. IRS Notice 2002-45 clarified what the service saw as compliant with the law. IRS Notice 2013-54 addresses what the IRS sees as being non-compliant with the law. Neither of these Notices codify or change section 105, because no change is needed. The provision that allowed tax free reimbursement of individual health premiums which were previously allowed by Revenue Ruling 61-146, has been withdrawn by the IRS as allowed by law.

You still have not been able to cite the tax code/law provision that allows tax free reimbursement of individual health premiums.

While there might be hundreds of CPA and law firms using some type of reimbursement arrangement, it is not structured as you think and I suggest that you check with a few. Consider that most CPA and law firms are Partnerships or LLCs which means that the Partners are not employees and therefore have different laws applicable.

You seem to have fallen for the pitch of some promoter and do not quite understand the issues. This is obvious from your use of the term HRP and your lack of understanding IRS Notices, codifying or even what IRS Publications are relevant to the issue.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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All of our opinions, interpretations, and analyses of this issue are ultimately beside the point. Is it not controvertible that the DOL/HHS/Treasury Department each takes the view that these arrangements are not permissible? In my opinion, to advise clients to take a contrary position without pointing out the significant risks of doing so is, or at least borders on, malpractice.

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Although interesting, this theorizing to make "reimbursement of individual premiums" as a viable strategy, is quite frankly, malpractice. The IRS & DOL have clearly come out and flatly said that an employer cannot reimburse individual insurance premiums. I'd up your E&O policy zbenefits. Just my 2 cents.

I mean geez... how much more plainly can every regulatory agency put it!

http://www.dol.gov/ebsa/faqs/faq-aca22.html

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Thank you for your responses.

I am happy to see such a high level of engagement on this topic.

Mr. Burns, you are correct; an IRS Notice does not codify law. Nor does IRS guidance. Of the many documents the IRS releases, only Final Regulations carry the force and effect of law. That being said, they are not law and are at risk of being struck down in court if it is determined they conflict with the actual law. Temporary Regulations carry the approval of the Treasury Department. Proposed Regulations and Revenue Rulings are essentially the official position of the IRS, but may be strictly limited to the facts or scope considered. And lastly are IRS publications, notices and announcements; which carry no authority and have, on occasion, been challenged in court by the IRS itself.

There are four key sections of the IRC that allow tax-preferred premium reimbursement via a self-insured medical reimbursement plan.
  1. IRC Section 105: Section 105 allows tax-free reimbursements from a self-insured medical reimbursement plan if the reimbursements are for expenses incurred for “medical care” as defined in Section 213(d).
  2. IRC Section 213: Section 213(d) defines “medical care” for personal deduction and Section 105 distributions, which includes amounts paid for insurance.
  3. IRC Section 106: Section 106 allows the value of the self-insured medical reimbursement plan to be tax-free to employees.
  4. IRC Section 162: Section 162 allows reimbursements to be tax-deductible to the employer as a business expense.

All of our opinions, interpretations, and analyses of this issue are ultimately beside the point. Is it not controvertible that the DOL/HHS/Treasury Department each takes the view that these arrangements are not permissible? In my opinion, to advise clients to take a contrary position without pointing out the significant risks of doing so is, or at least borders on, malpractice.

Chaz,

It is absolutely controvertible that the DOL/HHS/Treasury Department takes the view that these arrangements are not permissible. I would argue that the agency guidance does not prohibit the tax free reimbursement of individual health insurance premiums, it confirms that the plan used to do so must comply with the "market reforms" of the ACA.

Although interesting, this theorizing to make "reimbursement of individual premiums" as a viable strategy, is quite frankly, malpractice. The IRS & DOL have clearly come out and flatly said that an employer cannot reimburse individual insurance premiums. I'd up your E&O policy zbenefits. Just my 2 cents.

I mean geez... how much more plainly can every regulatory agency put it!

http://www.dol.gov/ebsa/faqs/faq-aca22.html

Benefits 101,

The FAQ you cite reiterates the previous guidance that Premium Reimbursement Arrangements are group health plans. The FAQs also reiterate the positions outlined in Technical Release 2013-03 from 2013 and further emphasize the importance of ensuring health insurance reimbursement programs comply with Public Health Service (PHS) Act Sections 2711 and 2713 (referred to in the FAQs as the “Market Reforms”).

In order to comply with the Market Reforms, a Premium Reimbursement Arrangement must be structured to comply with PHS Act Section 2711 annual limit rules and PHS Act Section 2713 preventive care rules.
PHS Act Section 2711 requires group health plans (including Premium Reimbursement Arrangements) not to place annual or lifetime limits on “essential health benefits.”
PHS Act Section 2713 requires group health plans (including Premium Reimbursement Arrangements) to cover basic preventive care services without cost-sharing.
It is important to note that PHS Act Section 2711 allows group health plans (including Premium Reimbursement Arrangements) to place annual limits on benefits that are not essential health benefits. Since health insurance premiums are not essential health benefits, group health plans (including Premium Reimbursement Arrangements) may place a “premium-specific” annual limit on premium reimbursements.
However, group health plans (including Premium Reimbursement Arrangements) may not place an annual limit on the basic preventive care expenses required by PHS Act Section 2713 because preventive care expenses are considered essential health benefits.
As discussed previously, one way to structure a compliant Premium Reimbursement Arrangement is to design the arrangement to reimburse employees for:
Health insurance premiums up to a specified monthly healthcare allowance, and
Preventive care as required by PHS Act Section 2713.
Gentlemen, I can see that my efforts to persuade you to look at the guidance and the tax-code without predetermining your position is failing. There is no doubt that the government wishes to limit the scope of these plans however, note that the federal regulators issued this new information as guidance rather as new law or regulations. This is because the regulators are over-stepping their statutory authority and don’t have the legal authority to expand ACA as they see fit—they must follow the actual law passed by Congress. To that end, I will leave you with Treasury Secretary Jack Lew's testimony in front of the Committee of Ways and Means: Treasury Secretary Lew.
Regards,

George Kelly

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However, group health plans (including Premium Reimbursement Arrangements) may not place an annual limit on the basic preventive care expenses required by PHS Act Section 2713 because preventive care expenses are considered essential health benefits.
As discussed previously, one way to structure a compliant Premium Reimbursement Arrangement is to design the arrangement to reimburse employees for:
Health insurance premiums up to a specified monthly healthcare allowance, and
Preventive care as required by PHS Act Section 2713.

No, you are incorrect. The ACA says "no limits on essential benefits"... not just preventative as you claim.

Now let me remind you that the IRS & DOL have forcefully said "bare bones plans" are illegal. So yes, one could reimburse individual premiums on an after tax basis AND implement a compliant group health plan... however, the cost of implementing both make that strategy a loser. I've actually looked into this arrangement for a non-profit with high premium costs and very low wages... making a carve out very attractive. I found out Its just not worth it. The "juice isn't worth the squeeze".

But according to your website, you don't advertise it this way, so again, purchase more E&O is my advice.

I think we are all engaged because somehow your website appears fairly high in Google searches. Congrats on the SEO. But when these ideas you advocate arise (and they do because of your website's SEO), the competent advisors here have to spend our time convincing clients how non-compliant your ideas are. It also adds confusion to the general public and they "don't know who to believe" which creates more busy work for us. So if you could just stop, that'd be great.

Now, If you are telling your clients all this, the incredible legal risk they take to save a few bucks... and they are willing to "go to bat" with you, cheers. But advertise it that way. Not doing so is malpractice.

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