One of our clients is looking into putting in a Section 105 plan to pay for their employees’ individual health insurance premiums. Our client is thinking about dropping their group health plan and getting their employees individual health plans and contributing an amount each month towards their premiums under a Section 105 plan. The company is a corporation. Is this something they can do and if so how does it work?
I wanted to get back to you quickly on this issue as this is not allowed.
An employer is not permitted to pay the premiums for an employee’s individual policy on a tax advantaged basis. Please see the article entitled “Agencies Issue Guidance Addressing Stand-Alone HRAs, Health FSAs, EAPs and Purchasing Individual Policies” from the Sept. 24, 2013 edition of Compliance Corner, which is attached.
Please also see the NFP white paper entitled “The Future of HRAs and Employer Reimbursement for Outside Coverage,” which is available at the following link and attached.
Lastly, please see the HR & Benefits Update, March/April 2014 edition which featured the Compliance FAQ “May an employer pay or provide reimbursement, on a pretax basis, for the cost of an employee’s individual policy?” The newsletter is attached and available at the link below. I have also included the answer for your convenience.
“No. Many third-party administrators or vendors are currently marketing products to employers claiming that the employer may reimburse employees for individual policy premiums on a pretax basis. These products may have a name such as Section 105 plan, Health Reimbursement Plan or Premium Reimbursement Arrangement. No matter what the product is called, effective in 2014, an employer may not pay or provide reimbursement, on a pretax basis, for the cost of an employee’s individual policy. In order for an employer to provide tax‑advantaged health benefits to employees, it must do so through a permissible arrangement, such as a Section 125 cafeteria plan, a health reimbursement arrangement (HRA),health flexible spending arrangement (FSA) or health savings account (HSA). Most of the products being marketed to employers fit the definition of an HRA.
An HRA is a self‑funded arrangement under Section 105 that is 100 percent employer funded and provides reimbursement for qualified medical expenses, which historically included premiums. However, on Sept. 13, 2013, the Internal Revenue Service issued guidance (Notice 2013-54) clarifying that an employer may not use a stand-alone HRA to reimburse the cost of an individual policy. To do so would violate the Patient Protection and Affordable Care Act’s (PPACA’s) prohibition on annual dollar limits for essential health benefits and the requirement to cover preventive services. For plan years starting on or after Jan. 1, 2014, an HRA must be integrated with a group health plan.
In regard to cafeteria plans, the Internal Revenue Code excludes individual marketplace coverage from the list of benefits that may be offered through a Section 125 cafeteria plan.
Further, Notice 2013-54 provides that other employer payment plans, which would include a cafeteria plan, may not reimburse employees for the purchase of an individual policy. Thus, an employee is not permitted to pay pretax premiums through an employer’s cafeteria plan for an individual policy purchased either inside or outside of the marketplace.
Per existing Treasury Regulations, insurance premiums are not a qualified medical expense from a health FSA. Finally, an HSA only permits tax-advantaged reimbursement of premiums in limited circumstances related to COBRA or USERRA coverage, qualified long-term care policies, an individual who is receiving unemployment compensation or an individual who is aged 65 or older.
In summary, an employer may not reimburse an employee on a tax-advantaged basis for the cost of an individual policy or pay for such coverage directly. Failure to comply could put the employer at risk for a penalty under PPACA, which is $100 per day per affected individual.”
VP, Benefits Compliance, Counsel
Legal and Compliance
NFP Insurance Services, Inc.
1250 Capital of Texas Hwy. S. | Building 2, Suite 125 | Austin, TX 78746
P: 512.697.6862512.697.6862 | F:512.697.5852 | firstname.lastname@example.org | www.nfp.com