Premium reimbursement v. expense reimbursement

[Guest lmccormick]

Correct me where I am wrong--please.

As I understand things an employer can use an HRA as a vehicle to reimburse employees for out of pocket medical costs as well as for individual health insurance premiums. An HRA requires a plan document and must treat all employees of a specified class equally.

However, an employee may reimburse individual employees for privately obtained health insurance premiums (section 106) that needn't be done across the board for everyone and no plan document per se is necessary.

Thus you only need the plan document and HRA when expenses are to be reimbursed, above and beyond outside insurance premiums.

Is this correct?

An employer I support has recently hired three new employees and as part of their benefits package has given two of them what he has deemed a $3000 medical stipend, the other gets a $2000 medical stipend.

I'm not sure how to treat the reimbursements (taxable or nontaxable). The employees must provide receipts along with their reimbursement requests. I'm thinking that for premium reimbursement it's fine to do without a plan document and it doesn't need to be offered the same to everyone. However for medical expenses other than premiums, I'm thinking that should be contained in an official plan document and the amounts made available to all employees. (Company has other employees for whom there are no medical benefits provided at all).

Can the employer do what he intends? If not, how can he legally accomplish what he's looking to accomplish?

I know that he could simply pay the reimbursements and make them a part of taxable income and there would be no issues but he'd rather keep them taxfree.

[leevena]

As for the HRA issue, you are partially correct. There does need to be testing done also.

I am confused by the second part of you posting, where you discuss the $2k and $3k stipend, specifically the statement "However for medical expenses other than premiums, I'm thinking that should be contained in an official plan document and the amounts made available to all employees." I am confused because I thought you said earlier that the stipend is for reimbursement of individual medical premiums.

Yes, the employer can accomplish what he is trying to do. You may want to look at a Section 105 plan to compliment your HRA.

Good luck.

[Don Levit]

Folks:

This is related to your question, but not directly.

The TX Department of Insurance recently published a bulletin stating that if employers pay individual premiums from an HRA, the insurer of that individual policy must make it avilable to every employee in the group.

Any comments?

Don Levit

[Guest Gompers]

That is one of the many reasons that I think reimbursing outside premiums for health coverage raises a host of issues.

1) I am not sold on the notion that you don't need a plan document to reimburse premiums. Code taxablity is only one piece of the puzzle. IRS rulings that address taxablity never address ERISA requirements. However, I think trying to address the Code requirements might put you in a box for other compliance issues. To have payment excluded under Code Section 106 the premiums must be for "employer-provided coverage under an accident or health plan." Once you have "employer provided coverage" under a "health plan" it seems to me that you have an ERISA welfare plan. Although there are some cases that you might be able to hang your hat on to the contrary, I am not sure whether they have ever addressed this issue completely. If it is an ERISA plan there is the requrement for a plan document. That is why if you are doing this, I think you should do it under an HRA where there will be no question that you have resolved both the Code and ERISA problems.

2) If it is "employer provided coverage" under a health plan, are there COBRA obligations? No individual policy will address COBRA obligations.

3) If it is "employer provided coverage" under a health plan are there HIPAA portability and discrimination issues?

4) Finally, if it is "employer provided coverage" under a group health plan are there HIPAA small market reform issues which would mandate that the coverage be offered to all employers in the small market and all employees of those employers. I think this turns back on quesiton No. 1. I wonder is this is what the Texas Dept. of Insuance is getting at? Look at:

http://www.nahu.org/legislative/regulatory/Hip00-6.pdf

[Guest Gompers]

BTW--If you are reimbursing actual medical expenses as opposed to premiums on a pre-tax basis this will have to be done through an HRA or a 105 plan (an HRA is simply a "flavor" of a 105 Plan). That with be subject to 105(h) discrimination testing.

If you are giving a choice between cash and this beneift it raises a host of other issues.

[Don Levit]

Gompers:

Thanks for providing that very interesting link.

One of the questions I will pose to the texas DOI is the purpose of this bulletin.

Are they concerned about "crowd-out" for the group market, if too many of the good risks opt out for individual policies?

I believe I had read some of the court cases of those mentioned in the link you provided.

The majority of cases had the employer involved to a greater extent than merely paying the premiums.

The employer helped select the policies, assisted in applying for claims, etc.

If the only stipulation was whether the employer subsidized the premium, I would think there would be no question that every individual policy would be considered a group policy, which, of course, is not the case.

Merely paying the premiums, particularly of a policy chosen and owned by the employee before ever coming to that particular employer, does not make the policy a group plan, in my opinion.

Don Levit

[Guest Gompers]

If you are taking the position that premium payments for an individual policy are not taxable to the employee under Code Section 106 then you are saying that the premiums are "employer-provided coverage under an accident or health plan." That is the exact language of the Code.

Then, turn to ERISA which says that a welfare plan is any "plan, fund, or program which... is established or maintained by an employer... maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise medical, surgical, or hospital care."

Thus, I think to say that it is covered under 106 but not covered under ERISA you would be arguing that the insurance is "employer provided" but not "employer maintained." Maybe this works, but in my thesaurus provide (for) and maintain are synonyms.

Once it is an ERISA welfare plan then it appears that at least under the language of ISBS-006 it would also be a group plan for HIPAA purposes.

Also, look at the advisory opionions cited in the ISBS. There are certain exemptions for group arrangments being ERISA welfare plan, but an employer paying the premium means the exception does not apply.

http://www.dol.gov/ebsa/programs/ori/advisory94/94-26a.htm

http://www.dol.gov/ebsa/programs/ori/advisory94/94-22a.htm

Again, I don't know if any case has done a complete analysis of this issue---including the comparision of Code Section 106 with ERISA's definiton of a welfare plan.

[Don Levit]

Gompers:

Thanks for providing those advisory opinions.

You certainly understand a lot of the nuances involved.

In both those opinions, the employers "endorsed" the coverage by providing inducements, in addition to paying the premiums, such as providing the employer's logos on the marketing brochures.

Merely paying the premiums does not make the coverage an ERISA plan.

Don Levit

[Guest lmccormick]

Don,

I have been conversing with a plan document seller who seems very knowledgeable (contrary to others I've spoken with).

She stated that individual premium reimbursement under an HRA is permissible federally but some states specifically disallow it. The states she named specifically are: Texas, Florida, Wisconsin and Kentucky.

When the employee signs up for the individual insurance plan they sign a statement indicating that they are not receiving employer reimbursement for their premiums either directly or indirectly. Thus, if it was found that they an employer was reimbursing through their HRA for those premiums that their policy may not be honored.

She also said other states have no issues with it but she only knew of North Carolina who has stated specifically it's not an issue. Her guidance was to leave it up to the employee seeking the reimbursement to check with their carrier before requesting the reimbursement.

I wish there were a specific source to go to for guidance.

Lisa

[Don Levit]

Lisa:

I received an e-mail today from Roy Ramthun, who is one of the primary authors of the HRA legislation. He agrees with my assessment.

I also have located a Fifth Circuit court case, which applies for Texas. I sent the case to Bill Bingham at the Texas Department of Insurance, and he has not replied back.

The case is Hansen v. the Continental Insurance Company, 940F.2D 971, 1991.

"The fact that a plan exists, however, does not necessarily mean the plan is an ERISA plan. As the Eleventh Circuit noted, an employer or employee organization... and not individual employees... must establish or maintain the plan, fund, or program. Donovan, 688 F.2d at 1373.

To determine whether an employer established or maintained an employee benefit plan, the court should focus on the employer and its involvement with the administration of the plan., Gaha, 926F.2d at 1452.

Thus, if an employer does no more than purchase insurance for her employees, and has no further involvement with the collection of premiums, administration of the policy, or submission of claims, she has not established an ERISA plan. Kidder, 932 F.2dat 353; Memorial Hospital, 904 F.2dat 242.

As this Court explained in one of its early cases on the subject, considering the history, structure, and purposes of ERISA, we cannot believe that that Act regulates bare purchases of health insurance where...the purchasing employer neither directly or indirectly owns, controls,administers, or assumes responsibility for the policy or its benefits. Taggart Corp. v. Life & Health Benefits Admin.,617 F.2d 1208, 1211 (5th Cir. 1980).

[Guest lmccormick]

But Don,

What does that all mean?

As I understand things the IRS does allow tax-free reimbursement of individual health insurance premiums but some states have an objection to it.

For instance in Florida when you apply for and sign up for an individual health insurance policy you are required by the insurance company to sign a form which says you are confirming that your employer is payin no part of your premium either directly or indirectly. If you are being reimbursed through and HRA that could be construed as being indirectly funded and is thus/not permissible.

I know companies do it all the time but I want to know if it really is permissible and if not, why not. I'm trying to to get an answer from Blue Cross Blue Shield of Florida on this subject thus far nobody really seems to know.

Lisa

[KJohnson]

1) I have never seen a case that tries to reconclie the notion that it can be tax-free under the Code and still not be a plan under ERISA. I understand the notion that you need some sort of employer administration to have an ERISA plan. However, if you don't have this administration then do you still have "employer provided coverage" which is neccessary to avoid taxation?

2) If it is considered a "group type arrangement" then paying premiums is enought to make it an ERISA Plan. (Of course this begs the question of whether it is a "group type arrantment" in the first instance) DOL Regulation section 2510.3-1(j) provides:

(j) Certain group or group-type insurance programs.

For purposes of Title I of the Act and this chapter, the terms "employee welfare benefit plan" and "welfare plan" shall not include a group or group-type insurance program offered by an insurer to employees or members of an employee organization, under which

(1) no contributions are made by an employer or employee organization;

(2) participation in the program is completely voluntary for employees or members;

(3) the sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collectpremiums through payroll deductions or dues checkoffs and to remit them to the insurer; and

(4) the employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.

3. As to Lisa's concern, I don't think the states really care about the taxation angle. What they do care about is an "end run" around HIPAA's small market reforms. They don't want use of multiple individual plans in an employment context to substitute for group plans where there are a host of restricitons regarding offering the plans to all eligible employees, not basing premiums on health status etc. My guess is that this why they are requiring the certification.

4. If you go to the EBIA "green binders" their "bottom line" advice is not to offer individual premium reimbursment for any benefit that is not excepted from HIPAA.

[Don Levit]

K Johnson:

Thanks for your reply.

Employers who pay all of a premium may have established an ERISA plan, if the employer has endorsed the coverage. Paying of premiums is only one indication the employer has endorsed the policy.

I am consulting with the Texas Department of Insurance about this very issue, which is the subject of a recently published bulletin.

Instead of this being reviewed on a case-by-case basis, the bulletin states that any premiums paid by an employer through an HRA makes the policy an ERISA plan. Thus, the insurer must offer the individual policy to all employees, without proving health.

I understand the intention of the bulletin, which is to protect the group market from adverse selection.

While possibly a good intention, their reasoning is flawed, in my opinion.

One reason comes from a fifth circuit case, Hansen v.Continental Ins. Co., 940F.2d 971 (5th Cir., 1991). If you are unable to get it, I would be happy to fax it to you.

Also, I can provide the link for the Texas Department of Insurance bulletin.

Don Levit

[KJohnson]

Don,

The point I am trying to make is that the only reason you would do this--instead of just giving all employees a taxable "raise" to go out and get their own health insurance-- is that you are trying to do it on a tax favored basis. If you are saying it is not an ERISA plan because it was individual coverage and the employer did not maintain or establish any plan, then how can you, at the same time, say that reimbursement of the premiums is "employer provided coverage under an accident or health plan" so as to be exempt under Code Section 106? Maybe you could, but I have never seen a case that says both that such an arrangement is not maintained by an employer for ERISA purposes but is employer provided coverage under an accident or health plan pursuant to Code Section 106.

Once it is an ERISA plan, it seems that it is a group plan for purposes of HIPAA and small market reform.

That's why I think if you are going to do this, doing it through an HRA makes the most sense because you have the "coverage" of a vehicle that you openly acknowledge is subject to ERISA and is a 105/106 health plan. You therefore don't have the deductibility issues or ERISA issues. You still get to the question with the state insurance authorities and thorny COBRA and HIPAA issues but you can at least point the insurance commissions to the HRA guidance which says that you can reimburse individual premiums.

Also, I think thatthat any insurance commission that takes the position that any employer contribution-- direct or in-direct-- throws the policy into the group market will have to be rethought in light of HSA's and DOL's guidance that these are not ERISA plans even if an employer contributes pursuant to FABs 2004-1 and 2006-2. You should ask them if they are taking the position that an HSA that contains employer contributions cannot be used to by an individual insurance policies. If they say yes, then I would then direct them to 11/2000 directive to insurance commissioners in a prior post (that group plan = ERISA plan) as well as the guidance that says HSAs are not ERISA plans.

Finally there is no question as to the non-taxable nature of employer contributions to HSA's. Regardless of whether they are employer provided coverage under the Code Section 106(a) general rule, they will be treated as employer provided coverage under Code Section 106(d) as long as certain other restrictions are met.

[Don Levit]

KJohnson:

Thanks for your reply. Reimbursement of the premium would not be employer-provided coverage, in my opinion, just because there is an employer-employee relationship that qualifies under Code Section 106.

The reason being that the employer must do something in addition to merely paying premiums to demonstrate this is an ERISA plan.

A couple of excerpts from Hansen v. Continental Insurance Co.

"The fact that a plan does not meet the DOL regulations for exclusion from ERISA does not mean that the plan is necessarily covered by ERISA. Kidder, 932 F.2d at 351-52; Gahn, 926 F.2d at 1452. Put another way, the plans excluded from ERISA coverage by the DOL regulations (you cited) are not the only plans not covered by ERISA.

As the Eleventh Circuit noted, an employer or employee organization, ... and not individual employees must establish or maintain the plan, fund, or program, Donovan, 688 F.2d at 1373.

If an employer does no more than purchase insurance for her employes, and has no further involvement with the collection of premiums, administration of the policy, or submission of claims, she has not established an ERISA plan. Kidder, 932 F.2d at 353; Memorial Hospital 904 F.2d at 242.

I agree with your points about HRAs being able to reimburse for individual premiums. While the HRA is an ERISA plan, would it not be exempt from state regulation if it was merely used to pay individual premiums?

I don't think that HSAs can purchase individual policies, except for COBRA purposes, and for periods of unemployment.

Your observation about HSAs not being ERISA plans was very astute. I think the same logic can be used for employer contributions to pay premiums for employees' individual policies without being considered ERISA plans.

Don Levit

[KJohnson]

Don, don't know what I was thinking. You are right on health insurance premiums and HSAs. I believe that the only real exceptions is premiums for a policy while receiving unemployment benefits.

I don't understand your statement that "Reimbursement of the premium would not be employer-provided coverage, in my opinion...." If that is the case, then are you saying the reimbursement is taxable? To be non-taxable under 106(a) the payment must be "employer-provided coverage under an accident or health plan"

[Don Levit]

KJohnson:

Would we be able to look at the taxation simply as the employer paying for an accident and health policy?

I get sections 105 and 106 confused as I get older.

Could the employer selectively choose which premiums to pay for, from the HRA, depending on which employees brought individual policies to the employer, without creating an ERISA plan?

Don Levit

[KJohnson]

Interesting discussion and link on today's "benefitslink" news..

11/27/2006: Individual Disability Insurance Policy with Employer-Paid Premiums Is an ERISA Plan (Employee Benefits Institute of America Inc.)

Excerpt: "The employee in this case made a claim under an individual disability policy offered by his employer. The employer paid all the premiums for the policy, and the premiums were not included in the employee's income. The insurer stopped paying benefits to the employee after a year and a half, concluding that he was no longer disabled. The employee sued the insurer in state court for benefits, breach of contract, and other claims."

[Don Levit]

KJohnson:

Thanks for providing this case.

The employer did more than merely pay the premiums.

He also decided annually whether to increase the disability benefit, and could have terminated the policy at any time.

Also it stated "that it is true that no single act constitutes the establishment of an ERISA plan; the purchase of insurance does not conclusively establish a plan."

While it does provide cases where an employer's payment of premiums, standing alone, was substantial evidence of the existence of an ERISA plan, it would be interesting to see the context in which this statement was given.

If you can provide any of those cases to me, on p. 9, I would appreciate it.

Also, if the employee bought the individual policy before coming to the employer, it would seem that the plan would not be an ERISA plan according to New Eng. v. Baig, distinguishing cases where there was a direct contractual arrangement between the insurer and the employer establishing the plan (as in the case you provided), or where direct payment of premiums were made by the employer to the insurer, as in Baig.

Don Levit