Health Insurance Question

[Guest pandy611]

I am new at this so bare with me. I just had a question. Any thought or ideas will help.

We currently have a doctors office who does not provide health insurance coverage for his employees. they are all covered under their spouses plans and a couple have individual policies they have picked up themselves. they have checked into group policies, but it would be way too expensive. They are adding a new full time employee and she will need coverage eventually. She is currently covered under COBRA. They want to know what they can do as an employer to cover her premiums. Could they pay her premiums directly to the insurance company and provide this benefit for her on a discriminatory basis.

[J Simmons]

An employer's payment of premiums for health insurance may be done on a discriminatory basis, and yet be tax-free to the employee. IRC sec 106(a) (containing no nondiscrimination requirement). The employer's right to a tax deduction is provided under IRC sec 162.

There are some ripple effects to consider. If you are allowing the employee the choice of the employer's payment of the health insurance premiums rather than additional pay, you have a constructive receipt of taxable income issue of what would've been tax-free but for the choice (that is, if the employer offered to pay the premiums, take it or leave but not get extra income in lieu thereof).

If you give the employee the choice, then you must meet the requirements of section 125 of the IRC. That can be a problem if this one employee is either a key employee or a highly compensated employee.

If not, you might be able to craft a payroll practice that meets 125 but does not amount to an ERISA plan (or when a second employee is given a similar choice, not be a 'group health plan' or benefit). Should it become an ERISA plan, a group health plan or a group health benefit, then the individual policies will not include 'bells and whistles' required by federal mandates, and the employer will be exposed to liability for the lack of those extra features.

[Don Levit]

John:

Then if the employer does not give the employee a choice, and merely pays the premium on an individual policy, there is no problem with discrimination, taxation, or the possibility of group coverage (assuming the employer has no involvement other than paying the premium)?

Don Levit

[GBurns]

pandy

Do both a Google search and a search of these Forums for "ruling 61-146" and "revenue ruling 61-146". The results will provide you with previous discussions etc on this same issue.

[J Simmons]

John:

Then if the employer does not give the employee a choice, and merely pays the premium on an individual policy, there is no problem with discrimination, taxation, or the possibility of group coverage (assuming the employer has no involvement other than paying the premium)?

Don Levit

There could easily be problems, though not with discrimination. Without the choice, then the employer is considered bearing the expense rather the employee. While discrimination is avoided, the fact that the employer's bearing the cost makes it more difficult to avoid ERISA, COBRA, HIPAA, PDA, etc.

[Don Levit]

John:

Ah, correct.

I have not come across a court case in which the employer who pays the premium, establishes a group policy, without other evidence of employer involvement.

I thought Revere v. Harabe would do it, but that was not the case.

Don Levit

[GBurns]

Don

Why is a court case relevant?

Also, in many states, the reimbursement of the premium might, by itself, create a group health plan under the state's Small Group and other rules.

[Don Levit]

George:

You are correct about states' insurance law.

Texas, in particular, had a bulletin issured by the Department of Insurance stating that any payments made from a cafeteria plan subjects an individual policy to the group insurance laws.

The reason I bring up federal court cases, is that I have several which have dealt with the issue of whether or not an ERISA plan was established by virtue of an employer paying part or all of the premium on an individual policy.

Not one court case that I have seen has come to the conclusion that an employer paying part or all of the premium for an individual policy, in and of itself, establishes an ERISA plan.

I would think that the state departments of insurance would take that into consideration before passing their edicts.

Don Levit

[GBurns]

I thought that Federal courts handle federal issues, whereas state courts handle state issues. What does state law and a state's determination of insurance mandates etc have to do with federal courts?

How is an ERISA determination relevant ? ERISA is only one of the many laws that have to be complied with by health and benefita plans. The fact that you can find no federal court that adjudicated as you state is irrelevant.

[Don Levit]

George:

Are you saying that a fifth circuit court ruling should be disregarded when the Texas Department of Insurance issues a bulletin regarding a similar issue?

Whether or not an ERISA plan is established has a direct impact on if a group insurance plan has been established.

Is it possible to have a group plan which is not an ERISA plan?

Don Levit

[J Simmons]

The ultimate question of whether a plan is governed by ERISA, and thus if a single-employer plan preempts state law, rests with federal courts. (If originally litigated in a state court that made the decision that ERISA did not apply to a plan and thus was subject to state insurance laws, the plan's administrator could petition a federal court to make its own determination.)

Many state insurance departments will have their own internal guides for when they will not touch a plan, deeming from that department's perspective that ERISA does apply. Under such circumstances, the department's agents are instructed to take no action to enforce certain state insurance laws in regards to such plans.

However, there are many aspects of state insurance laws that survive preemption and thus apply to ERISA plans under the savings clause.

As to some non-preempted state insurance laws, those state laws could be keyed by that state to apply whenever a cafeteria plan is used to pay premiums. That wouldn't change the federal tax effect of using a cafeteria plan--that's federal law, as George explains. However since not all cafeteria plans are ERISA plans, such a state rule would have a broader-than-just-ERISA-plan application and thus might survive a preemption challenge under the savings clause.

[Don Levit]

John:

I don't see this as a preemption issue.

State laws apply to fully insured plans.

The question is which state laws - group or individual?

I contend that whether or not group state laws apply, depend on if the policy is part of an ERISA plan.

If it is not part of an ERISA plan, how can an individual policy be subject to the state's group laws?

Don Levit

[J Simmons]

"If it is not part of an ERISA plan, how can an individual policy be subject to the state's group laws?"

It depends on the state's definition of group plan. An arrangement with individual policies could fall within the ambit of 'group plan' of a state's insurance laws, independently of whether apply does or does not apply. If the state law says to be 'group plan' subject to some state law requirement the arrangement must be an ERISA plan, then the state law is aimed at ERISA plans and likely pre-empted by ERISA. To apply and not be ERISA preempted, the state law must apply more broadly than just to ERISA plans. Thus, an individual policy arrangement that ERISA might not apply to could yet be subject to that state's 'group laws'.

[Don Levit]

John:

When you wrote "if the state law says to be a group plan subject to some state law requirement, the arrangement must be an ERISA plan," how do you come to that conclusion?

ERISA plan is a federal definition, not a state definition.

Don Levit

[J Simmons]

ERISA plan is most certainly defined by federal law. But what about a state law that might by reference use that definition for then imposing some state requirement?

I'm not familiar with Texas state laws. My comment was not about any specific state law or the laws of any specific state. Many provisions of various state's laws simply refer to concepts already defined by federal law rather than going to the trouble of creating a new, separate definition. The passage you quoted me as having written was "if" some state law in essence borrows a definition provided under ERISA, then... . I don't know that whatever state law you have in mind does or does not do so.

[GBurns]

John

Thank you for your responses. I did not feel like flogging a dead horse again.

Don

A circuit or any court ruling can be disregarded if either not applicable, can be distinguished or just not similar enough. Something can be similar yet different. It is a facts and circumstances decision.

[CEB]

Do your self a favor, increase the individuals pay and they can decide if they would like to use the extra compensation towards purchasing individual insurance. Than you do not get involved in providing insurance for one employee.

[J Simmons]

True, but there is generally no tax advantage that way unless the employee will itemize on Schedule A to Form 1040 and have other health expenses that total to at least 7.5% of his or her AGI.

[J Simmons]

However, the tax savings might be limited in the near future anyway. That's according the Washington Post's blog, citing the Congressional Quarterly, that claims President Obama explains that savings from controlling the cost increases of medical care will more than offset any losses from tax-savings on employer provided health coverage, and thus the loss of the tax-savings should not be a concern to those affected. The reference is to limiting, not eliminating the tax break for employer provided health coverage. This might be a means-tested issue, limiting the tax-break for employer provided health coverage for those employees that earn over a certain amount.