Employer-funded Individual and Family Health Plans

COMPLIANCE Question: Can an EMPLOYER fund Individual & Family Health Plans for employees on a Pre-Tax basis under the Affordable Care Act (ACA)?

Released on September 13, 2013, IRS Notice 2013-54 addresses the legality of offering individual health insurance plans (as opposed to traditional employer-sponsored group plans) as a tax-advantaged employee benefit. The short answer is NO: the IRS determined that such plans are prohibited under the ACA.

Please quickly review the details of the prohibition so that, as a client of Benefits by Design, Inc., you will understand that our priority is to help you obey the law, even though providing individual policies sometimes would fit your need.

The following arrangements and/or plans are now prohibited under the Notice:

  • Any arrangement or plan (Health FSA, HRA) through which an employee’s individual health insurance premium is reimbursed or subsidized by the employer in a tax-free (or otherwise “tax-favored”) manner.
  • Arrangements whereby an employer reimburses employees for individual health insurance premium payments (sometimes called “premium reimbursement arrangements” but referred to in the ruling as “employer payment plans”).
  • Section 125(f)(3) or Premium-only plans (“POP”) through which employees can pay for their individual health insurance on a pre-tax basis.

We at Benefits by Design, Inc. consider this language totally unambiguous. If a client wishes to ignore this ruling and pay for employee-purchased individual health plans, we will require a “hold harmless” signature from the Employer, and will first provide the documentation for the Employer’s legal consultants to review. Paying for individual health plans or other salary pre-tax reimbursement arrangements and plans are strictly and explicitly prohibited with this IRS ruling, and backed by similar rulings from relevant agencies: “The Departments of the Treasury (Treasury Department), Health and Human Services (HHS), and Labor (DOL) (collectively, the Departments) are continuing to work together to develop coordinated regulations and other administrative guidance to assist stakeholders with implementation of the Affordable Care Act. The guidance in this notice is being issued in substantially identical form by DOL, and guidance is being issued by HHS to reflect that HHS concurs in the application of the laws under its jurisdiction as set forth in this notice.”

Final questions regarding employer/individual purchase have been asked since the Notice release last September:

  • The prohibition is NOT limited to individual health insurance plans sold in the “marketplaces” (formerly called “exchanges”.) The prohibition does apply to EVERY individual health insurance plan.
  • For the purposes of the ACA, these sorts of arrangements and/or plans are considered (pursuant to the Notice) to be “group health plans,” even though they are comprised of individual health plans.
  • Specific exceptions apply for limited purpose supplementary plan (e.g. Accident only, Hospital only, etc.), in which “coverage consists solely of excepted benefits.” See Code § 5000A(f)(2) and Treas. Reg. § 1.5000A-2, 78 Fed. Reg. 53646, 53658 (August 30, 2013).