Paying Premiums for
Individual Health Insurance
The Internal Revenue Service (IRS) Notice 2013-54 (Notice) issued in September 2013 addresses
how certain reforms under the Patient Protection and Affordable Care Act (ACA) apply
to health reimbursement arrangements (HRAs), cafeteria plans and other employer
payment plans. The Notice is effective for plan years beginning on or after January 1, 2014.
The Notice discourages employers from helping
employees pay for individual policies in lieu of offering a group health plan
by eliminating the tax savings associated with contributions toward individual
coverage. Effective for 2014, if employers want to help employees pay their
individual policy premiums, it generally must be on an after-tax basis. Employers may, however, continue
to provide group health coverage for their employees on a tax-free basis.
This Legislative Brief outlines how employers
have traditionally paid for employees’ individual policy premiums on a tax-free
basis, and summarizes how the ACA affects these arrangements starting in 2014.
HRAs
HRAs have been used by employers to help employees
pay for the cost of individual insurance policies on a tax-free basis. Unlike
health flexible spending accounts (FSAs) and health savings accounts (HSAs),
HRAs can be used to reimburse health insurance premiums. Also, unlike an HSA,
an individual does not need to be covered under a high- deductible health plan
(HDHP) to participate in an HRA. This has made HRAs particularly compatible
with individual health insurance policies.
The Notice addresses how the ACA’s market
reforms apply to HRAs, including HRAs that are not integrated with other group
health coverage, or stand-alone HRAs. An HRA used to purchase coverage on the
individual market cannot be integrated with that individual coverage, and is
considered a stand-alone HRA. Some stand-alone HRAs are not subject to the
ACA’s market reforms because they fall under an exception, such as retiree-only
HRAs. However, beginning in 2014, stand-alone HRAs that do not fall under an
exception will not be permitted due to the ACA’s annual limit prohibition and
preventive care requirements.
Thus,
effective for 2014 plan years, employers will not be able to offer a
stand-alone HRA for employees to purchase individual coverage, inside or
outside of an Exchange, without violating specific provisions of the ACA and
risking exposure to severe financial penalties.
EMPLOYER PAYMENT PLANS
In Revenue Ruling 61-146, the IRS provided
that if an employer reimburses an employee’s substantiated premiums for
non-employer sponsored hospital and medical insurance, the payments are
excluded from the employee’s gross income under Internal Revenue Code (Code)
section 106. This IRS guidance allowed an employer to pay an employee’s
premiums for individual health insurance coverage without the employee paying
tax on the amount.
The Notice refers to this type of arrangement
as an “employer payment plan.” An employer payment plan appears to also include
any tax-advantaged arrangement to pay for individual health insurance premiums,
including employee pre-tax salary reduction contributions paid through a
cafeteria plan.
Similar to the guidance for HRAs, the Notice
provides that an employer payment plan
that reimburses employees for their individual insurance policy premiums will
not comply with the ACA’s annual limit prohibition and preventive care
requirements. Thus, effective for 2014 plan years, these plans will essentially
be prohibited.
However, an employer payment plan does not
include an employer-sponsored arrangement that allows an employee to choose
either cash or an after-tax amount to be applied toward health coverage. Thus, premium reimbursement arrangements
made on an after-tax basis will still be permitted.
CAFETERIA PLANS
A Section 125 Plan, or cafeteria plan, can be
used by employers to help employees pay for certain expenses including health
insurance, on a pre-tax basis. The proposed cafeteria plan regulations from
2007 allow for the pre-tax payment or reimbursement of individual health
insurance policy premiums under a cafeteria plan. However, the ACA changes this
rule and prohibits cafeteria plans from paying or reimbursing premiums for
individual health insurance policies, effective for 2014.
The ACA’s prohibition on including individual
health insurance policies under a cafeteria plan applies to policies purchased
on an Exchange and through the private market, as follows:
·
Exchange
Coverage: The ACA provides that individual health
insurance offered through an Exchange cannot be reimbursed or paid for under a
cafeteria plan. Exchange coverage may be funded through a cafeteria plan only
if the employee’s employer elects to make group coverage available through the
Exchange’s Small Business Health Options Program (SHOP).
·
Non-Exchange
Coverage: The Notice
indicates that, effective for 2014, cafeteria plans may not be used to pay
premiums for individual health insurance policies that provide major medical
coverage. However, it appears that this restriction does not apply to individual
policies that are limited to coverage that is excepted from the ACA’s market
reforms, such as retiree-only coverage, or limited-scope dental or vision
benefits.
Thus,
effective for 2014, the tax exclusion provided through a cafeteria plan is only
available when group coverage is purchased. Employers that want to contribute
toward the cost of individual coverage must do so on a taxable basis.
The Notice provides a transition rule for
certain cafeteria plans for plan years beginning before Jan. 1, 2014. For
cafeteria plans that as of Sept. 13, 2013, operate on a plan year other than a
calendar year, the restriction on purchasing individual Exchange coverage
through a cafeteria plan will not apply before the first plan year that begins
after Dec. 31, 2013. However, individuals may not claim a premium tax subsidy
for any month in which they are covered by an individual plan purchased through
an Exchange as a benefit under a cafeteria plan.
