Closing Affordable Care Act Loopholes
Posted by George Kasper and Sharon Freilich
The U.S. Departments of Labor, the Internal Revenue Service and the Department of Health and Human Services recently issued guidance clearly stating that employers may not, without incurring penalties, (i) reimburse employees who obtain individual health insurance coverage either from an insurer or a health care exchange; (ii) offer incentives to employees with high claims risk to drop employer coverage and obtain individual insurance coverage; or (iii) exclude hospitalization or physician services coverage from the employer’s medical insurance plan. These pronouncements respond to certain strategies being marketed to employers which purport to reduce costs while complying with the requirements of the Affordable Care Act (the “ACA”).
Premium Reimbursement Arrangements
Employers have often reimbursed employees for various medical expenses not paid by employer health plans, and in some instances employers have also reimbursed employees for the cost of health insurance coverage purchased by the employee in the individual policy market. Following enactment of the ACA, however, the DOL and the IRS issued guidance indicating that reimbursement of the cost of individual health insurance coverage was not permitted. Despite this clear guidance, some vendors continued to present variations of this type of prohibited reimbursement as a strategy for reducing health insurance costs.
The guidance recently released makes crystal clear that an arrangement where the employer offers employees cash to reimburse the purchase of an individual market policy does not comply with the ACA. It does not matter whether the employer treats the reimbursement amount as pre-tax or post-tax payment to the employees. An employer that offers such an arrangement will be subject to a $100 per day per affected employee penalty under the ACA. Applicable Large Employers may also be subject to employer mandate penalties.
Note, however, that pre- or post-tax reimbursements of premiums for group health insurance, such as a spouse’s plan or COBRA continuation coverage and health reimbursement accounts (HRA) integrated with an employer’s group health plan, are still permitted.
Incentives to Drop or Opt out of Coverage
To reduce risks and plan costs some employers (particularly those with self-insured plans) identify employees with high claims risk and offer them a choice of coverage in the employer’s group health plan or cash. The new guidance states that these arrangements constitute discrimination based on health factors in violation of HIPAA nondiscrimination rules. Employers that implement this strategy may be subject to penalties of $100 per day per affected employee.
Low-Cost Health Insurance Coverage Strategies
In other new guidance, the HHS and IRS state generally that health plans that do not provide coverage for in-patient hospitalization services and/or physician services, other than those that relate to preventive health care services, do not satisfy the minimum value standard intended by the ACA. Regulations will be amended in 2015 to implement this guidance. For employers with such plans, no penalties will be assessed for 2015 if the plan is currently in place or if the employer had committed to such plan before November 4, 2014 and the plan year begins by March 1, 2015. After 2015, and for new plans which do not satisfy that requirement, the $3,000 employer mandate penalty will apply. Also, employees covered by such a plan are eligible for a premium tax credit, and employer communications about the plan may not state or imply otherwise and an employer must correct prior disclosures that did so.
Lessons Learned
The main lesson to be learned is that the government is on the lookout for plan designs which are intended to nominally comply with the ACA but which skirt the intent of the law. A secondary lesson is just because something seems to be compliant with the requirements of the ACA, it’s not necessarily so. It is best to make sure that your advisors are knowledgeable and when in doubt, get a second opinion. The consequences of being wrong could be painfully expensive.
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