Employer-Provided Individual Policies

[Guest Doug Johnston]

There doesn't appear to be any requirement in IRC 106 that employer-provided health coverage must be a group policy. The employer can also make tax-free contributions toward the cost of individual policies for its employees. Does anyone know any regulation, ruling, or other cite where this is explicitly stated?

Also, are there any guidelines for the administration of employer-provided individual coverage? Does the employer have to make payments directly to the insured, or can the employee be reimbursed under an "accountable" plan?

Finally, does anyone have a feel for how common such an arrangement is and/or if there are other pitfalls?

[KIP KRAUS]

Unless you are talking about an employer so small that they can’t get medical coverage through a group insurance arrangement I don’t know why an employer would want to purchase individual medical policies. Typically an employer can get group coverage cheaper and better than an individual can.

[Guest SheilaLuken]

You should look into your state's department of insurance rules. I know a number of state insurance departments prohibit employers from paying an employee's individual insurance premium because it is seen as an "end-run" around the small group rules.

[mroberts]

As far as pitfalls go, this just doesn't sound too good. Who wants to keep track of a bunch of individual policies? Is there any reason why the employer does not want to purchase a group plan? As Kip pointed out, getting group coverage would be far more advantageous from a group perspective since it's far cheaper and much more comprehensive.

[Guest Doug Johnston]

The "plan" is actually to provide a fixed monthly income supplement to retirees to offset health care costs. The employer is relatively large - over 1000 employees. Some retirees still participate in the group plan, but others have individual plans and/or medicare.

I couldn't find anything in the state (Virginia) insurance rules prohibiting an employer from paying for individual coverage.

Thanks for your comments.

[Guest registered user]

Take a look at HHS Insurance Standards Bulletin 00-06. It was issued in November of 2000. I'll try to attach it. It is also available on the HHS website under HIPAA:

http://www.hcfa.gov/medicaid/hipaa/content/Hip00-6.pdf.

It points out both that it is theoretically ok for an employer to go with non-group polices, and (less clearly) the problem with that.

The federal government doesn't care if the contract is, for state law purposes, structured as a "group contract" or an "individual contract". If an employer pays for it, it is an Employee Welfare Benefit Plan under ERISA, and therefore a "Group Health Plan" under HIPAA.

The problem is that there are approximately zero insurers that sell individual policies designed to meet the compliance obligations of an employer such as: recognition of creditable coverage, limitation on pre-ex lookback per HIPAA, Women's Health and Cancer Rights, Mental Health Parity etc.

Insurers design those features into their group policies to meet the compliance needs of their group customer, but not so with their individual policies. Most insurers will refuse to sell an individual policy if they are aware of an employer contribution. But if they do, the employer will have its own potential problems with DOL and IRS.

[Kirk Maldonado]

I agree that typically group coverage is cheaper. However, I've had several clients over the years have such horrible claims experience that they advised people not to elect COBRA because they could get individual coverage much cheaper than their COBRA costs.

[Guest taylorjeff]

For what its worth, I work in Illinois and the individual plans can be much less expensive than the group plans. The reason for this is they are individually underwritten, not guarantee issue, and don't have to comply with all the group plan requirements Mr. Jenkins noted above. We have (and I think most states do also) a Small Group Rating Act which limits the maximum rates insurors can charge groups with from 2 to 50 employees to 125% of their average manual rate. In effect, clean groups pay higher rates so sicker groups can buy coverage at more "affordable" rates. This along with the HIPAA guarentee issue rules usually make the group rates more expensive.

[Guest gconrad]

This may be overly simplistic - but I have the quintessential situation - one employee, no group plan available, a written company policy that says it will pay up to $X per year by writing checks directly to provider of an individual policy, provided it is owned by the employee and beneficiaries are limited to him and his family. State is Maryland. State insurance commissioner says there is no state policy that precludes providing insurance by having employer pay premiums for an individual policy.

I recently submitted two questions to the IRS website:

1. Must these payments be regarded as "income" by the employee?

2. Does it matter that the payments are going, for now, to a provider identified by prior employer in keeping with its COBRA plan, i.e. the payments are for the employees COBRA.

IRS responded that 1) the "plan" qualifies and this is not income, and that 2) t makes no difference that the payments are for a COBRA-related plan.

Anyone who wants details can email me at gconrad@winterlinefoundaiton.com.

- Glenn Conrad

[GBurns]

The authority for what you want to do is found in Revenue Ruling 61-146 and was also alluded to in Rev Rul 2002-3.

you might also want to browse some of the old threads as far back as 01/1999 for similar but more in-depth discussions.