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Defining Group Health Plans: Key issues

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Update for 2018 – In December 2016 the IRS issued guidance for the Qualified Small Employer
HRA Plan for groups with 50 or fewer full time employees to reimburse non-group premium and medical, dental, vision,
and all allowed IRS 213(d) expenses. See: /qsehra/

Understand

November 20, 2014 – by Timothy Jost –

A primary goal of the Affordable Care Act is to extend individual health insurance coverage through the exchanges and
the premium tax credits to Americans who would otherwise be uninsured. But most working-age Americans and their
families remain insured through employer-sponsored group coverage. While seeking to expand individual coverage,
therefore, the ACA also attempts to preserve group coverage.

Employers and those who advise employers have, however, sought to break down the barrier between group and individual
coverage. That is, they have tried to figure out how employers can subsidize individual coverage for their employees
rather than provide group coverage. If this were possible, employers could assist their employees to secure coverage
while avoiding the burden of operating a group health plan. Employees might be able to simultaneously receive the
benefits of employer contributions and of premium tax credits. It might even be possible for employers to shunt off
their high-cost employees with poor health status to the exchanges, where they would be charged community-rated
premiums, while keeping healthy employees in a group plan, which would likely receive a favorable rate based on claims
experience.

In earlier guidances, the Departments of Labor, Treasury, and Health and Human Services clarified that
employer health care arrangements, such as health reimbursement accounts and employer payment plans, are group health
plans subject to the group market reforms of the ACA, including the prohibition of annual limits or the requirement to
cover certain preventive services. Such arrangements must therefore be integrated with a group health plan that meets
these requirements, therefore, to comply with the law. They cannot be integrated with individual policies and comply
with the law.

On November 6, 2014, the Departments released a series of FAQs further clarifying the legal limits on employer efforts to steer employees into
individual policies. The FAQ first states that employers may not provide cash reimbursement to employees, either
pre-tax or post-tax, to purchase individual health insurance policies. Any such arrangement is a group health plan, and
would fail to comply with the ACA market reforms, subjecting the employer to penalties and excise taxes under the
Internal Revenue Code.

Second, an employer may not offer employees with high claims risk the option of enrolling in a group health plan or
receiving cash. This would violate the prohibition of the ACA, and of the prior Health Insurance Portability and
Accountability Act, against discrimination based on health status. Although the discrimination regulations allow
employers to offer employees with adverse health factors more favorable eligibility rules or reduced premiums,
so-called, benign discrimination, cash-or-coverage arrangements do not qualify for this exception. Such arrangements
are illegal regardless of whether the cash contribution is pre- or post-tax, the employer is involved in the selection
or purchase of any individual market product, or the employee in fact obtains individual health insurance.

These arrangements do not qualify as benign discrimination for two reasons. First, to obtain standard coverage, the
high-risk employee must forego the offered cash contribution. In effect, therefore, coverage costs more for the
high-risk employee than other employees because the employee must not only pay the same employee premium contribution to
obtain coverage that other employees must pay, but must additionally forego the offered cash contribution. Second
cash-for-coverage arrangements discourage high-risk employees from participating in employer-sponsored group health
plans and thus discriminate against them. Finally, because a cash-or-coverage arrangement is effectively a section 125
cafeteria plan, such an arrangement may violate separate section 125 discrimination rules.

A third question addresses so-called Code section 105 reimbursement plans. A vendor has claimed that employers can
cancel group coverage and set up a “section 105 reimbursement plan” that allow employees to receive both contributions
from their employers and premium tax credits for the purchase of individual coverage. These arrangements are
problematic for several reasons. First, they are group health plans, and thus employees who receive assistance through
them are ineligible for premium tax credits and cost-sharing reduction payments. Second, as group health plans, such
arrangements violate the group market reform preventive services requirement and annual limit prohibitions. Employers
who use these arrangements, therefore, are subject to penalties and excise taxes under the Internal Revenue Code.

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