It appears that the pre-tax reimbursement of individual premiums under a premium only plan (POP) (under Code Section 125) is directly at odds with the prohibition against any annual limit on the dollar amount of essential health benefits under the Affordable Care Act (Act).
On Friday, September 13, the Departments of Labor, Treasury and Health and Human Services provided guidance on the application of certain provisions of the Affordable Care Act (Act) on health reimbursement arrangements (HRAs), certain health flexible spending arrangements (Health FSAs) and employee assistance programs (EAPs). It was clear from the initial reading of the guidance that individual premiums could not reimbursed by HRAs. In a further reading of the guidance, there appears to be more serious consequences.
The new guidance created a new term known as an "employer payment plan." It is defined as a group health plan under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy (such as a reimbursement arrangement described in Revenue Ruling 61-146) or arrangements under which the employer uses its funds to directly pay the premium for an individual health insurance policy covering the employee. It is now clear that an employer payment plan is any plan that relies on the exclusion from income under Code Section 106. Revenue Ruling 61-146 was cited in the 2007 proposed cafeteria plan regulation that officially approved the use of POPs to purchase individual market policies on a pre-tax basis.
In the definition of employer payment plan, it indicates that any arrangement which an employee may choose either cash or an after-tax amount to be applied toward health coverage will not be considered an employer payment plan. While not clearly stated in the guidance, some commentators have indicated that the pre-tax reimbursement of individual premiums under a POP would constitute an employer payment plan. If this is true, this will include even an employee pay all pre-tax arrangement under a POP would be prohibited to reimburse individual premiums.
Code Section 125 merely provides for the non-taxability of the choice between cash and pre-tax benefits. Code Section 125 does not provide the actual exclusion from employee income for employer-provided health coverage. That exclusion is reserved exclusively under Code Section 106. For tax (but not ERISA) purposes, amounts deducted from employees' pay under a cafeteria plan election are treated as employer contributions. This is so because employee deferrals are made under a salary reduction agreement-the employee agrees to a reduction in salary in a specified amount and the employer agrees to contribute a like amount toward the purchase of qualified benefits (medical coverage, in this instance).
Therefore, any employee pre-tax contributions to a POP will be treated as employer funds and payment of premium by the employer with those funds (which are excluded from the employee's gross income under Code section 106) essentially becomes an employer payment plan. Employer payment plans for individual coverage fail Q&A-1 in Part III of the guidance, which provides:
Question 1: The HRA FAQs provide that an employer-sponsored HRA cannot be integrated with individual market coverage, and, therefore, an HRA used to purchase coverage on the individual market will fail to comply with the annual dollar limit prohibition. May other types of group health plans used to purchase coverage on the individual market be integrated with that individual market coverage for purposes of the annual dollar limit prohibition?
Answer 1: No. A group health plan, including an HRA, used to purchase coverage on the individual market is not integrated with that individual market coverage for purposes of the annual dollar limit prohibition. For example, a group health plan, such as an employer payment plan, that reimburses employees for an employee's substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. However, the employer payment plan will fail to comply with the annual dollar limit prohibition because (1) an employer payment plan is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement, and (2) an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement.
