Can My Employer Reimburse My Individual Health Insurance Premiums?

Yes, If You Work for a Small Employer; Otherwise Yes Starting in 2020

Under IRS guidance related to implementation of the Affordable Care Act (ACA), employers were not allowed to directly reimburse employees for the cost of individual maket health insurance. This was true for both small and large groups, and employers faced steep fines for noncompliance.

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But the 21st Century Cures Act opened the door for small employers to start reimbursing employees for individual market health insurance premiums as of 2017. And the Trump administration finalized new regulations in 2019 that allow employers of any size to reimburse employees for the cost of individual market coverage, starting in 2020. We'll explain both of these provisions in this article.

Small Groups: Employer Reimbursement Allowed as of 2017

The Affordable Care Act only requires employers to offer health insurance benefits—to employees who work at least 30 hours per week—if they have 50 or more employees. But 96% of employers in the US have fewer than 50 employees and are thus not required to offer health benefits to their workers.

Many of them do, of course. According to a survey conducted by the Transamerica Center for Health Studies in August 2015, health insurance benefits were offered by 61% of businesses with fewer than 50 employees. But that might be a high estimate. A National Federation of Independent Business analysis indicated that only 29% of businesses with fewer than 50 employees were offering coverage in 2015. And Kaiser Family Foundation reports that about 30% of businesses with fewer than 50 employees were offering health benefits as of 2018.

Small group health insurance plans are available in every state, and innovative approaches to self-insurance have made this coverage option more realistic for small employers as well. But what about the people who work for all of the small businesses that don't offer health insurance benefits? They have to use the individual health insurance market, where they can purchase coverage through the health insurance exchange, or outside the exchange (the ACA's premium subsidies and cost-sharing subsidies are not available outside the exchange).

For plans purchased in the individual market (on or off-exchange), the enrollee—as opposed to an employer—is responsible for paying the premiums, although subsidies (which are actually tax credits) are available in the exchange for people who qualify based on their income.

Early ACA implementation regulations prohibited employers from reimbursing employees for individual market health insurance. For small employers, this changed as of 2017, under the 21st Century Cures Act (more details below), but let's take a look at how the rules were interpreted prior to 2017:

The ACA itself left this issue somewhat open to interpretation, but the IRS subsequently addressed the issue directly, and the penalty for non-compliance was steep: an excise tax of $100 per day, per applicable employee. That could be as high as $36,500 per year in fines for each employee for whom the employer reimbursed individual health insurance premiums. The regulations were scheduled to take effect in January 2014, but a transitional relief program was put in place that delayed the penalty until July 2015.

Essentially, the way the IRS interpreted ACA statute, reimbursing employees for individual market premiums was considered an "employer payment plan." Such plans are subject to group health insurance market reforms, including the ban on lifetime and annual benefit limits, and the requirement that certain preventive care be covered at no cost to the enrollee

And the IRS specifically clarified that employer payment plans could not be combined with individual market health insurance plans in order to fulfill the market reform requirements. This was true regardless of the fact that the ACA's market reforms do apply to individual market plans, and all new individual market plans are sold without lifetime or annual benefit limits, and with the same preventive care benefits as small group health plans.

There was nothing preventing employers from giving their employees a raise or taxable bonus in lieu of providing health insurance benefits. But the tax-advantaged benefits of group health insurance premiums and health reimbursement arrangements were not available to be used in order to reimburse employees for individual health insurance premiums.

21st Century Cures Act Passed in 2016, Allows Reimbursement Starting in 2017

In December 2016, H.R.34, the 21st Century Cures Act, was signed into law by President Obama. The legislation is far-reaching, but one of the changes it made was to allow businesses with fewer than 50 employees to establish Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs).

If a small business doesn’t offer a group health insurance plan, a QSEHRA will let the business reimburse employees, tax-free, for some or all of the cost of purchasing individual market health insurance, on-exchange or off-exchange (if the plan is purchased on-exchange, the employee could still be eligible for a premium subsidy, but the value of the QSEHRA is considered when determining affordability of the coverage, and the amount of the ACA subsidy is reduced by the amount that the employee receives from the employer through the QSEHRA).

Using a QSEHRA, the maximum amount that an employer can reimburse in 2020 is $5,250 for a single employee's coverage, and $10,600 for family coverage (these amounts are indexed by the IRS each year). The maximum reimbursement is also prorated by month, so an employee hired in the middle of the year would only be eligible for a prorated amount of the maximum annual reimbursement.

Who Is Helped by the New QSEHRA Reimbursement Rules?

For employees who work for small businesses that don't offer health insurance, the availability of premium subsidies in the exchanges depends on income, along with family size and the cost of coverage in the applicant's area. In general, subsidies are available in most cases if the applicant's household income (an ACA-specific calculation) doesn't exceed 400% of the poverty level.

If you're currently receiving a premium subsidy (premium tax credit) in the exchange and your employer begins reimbursing premiums under a QSEHRA, the exchange subsidy would be reduced by the amount of the employer reimbursement. 

But if you're not eligible for a premium subsidy in the exchange (or if you are, but have opted to buy your coverage outside the exchange, where subsidies aren't available), a QSEHRA could directly benefit you if your employer decides to take advantage of that option.

This article outlines various situations in which a QSEHRA benefit can be helpful, harmful, or neutral to an employee's financial situation.

New Regulations Allow Employers of Any Size to Reimburse Individual Market Premiums Starting in 2020

Prior to 2020, large employers were not allowed to reimburse employees' individual market premiums. Employers with 50 or more full-time employees are required to offer group health insurance (purchased from an insurance company or self-insured) in order to avoid the ACA's employer mandate penalty, and they faced even steeper penalties, as described above, if they reimburse employees for individual market premiums.

But in October 2017, President Trump signed an executive order aimed at relaxing the rules on this issue. The executive order didn't change any rules on its own; it simply directed federal agencies to "consider proposing regulations" that would accomplish various goals. 

One of those goals was to expand the use of health reimbursement arrangements (HRAs) and provide more flexibility in their use, including "allow[ing] HRAs to be used in conjunction with nongroup coverage." 

A year later, in October 2018, the Departments of Labor, Treasury, and Health & Human Services published proposed regulations to allow the use of HRAs in conjunction with individual market coverage, regardless of the size of the employer.

The regulations were finalized in June 2019, mostly as proposed but with some changes. The new rule took effect as of January 2020, allowing large employers to fulfill the ACA's employer mandate by offering an individual coverage HRA (known as an ICHRA, pronounced "ick-rah") used to reimburse employees for the cost of individual market health insurance. [The rule also allows employers to offer "excepted benefit" HRAs, which can be used to reimburse premiums for coverage that's considered an excepted benefit. But since excepted benefits are not minimum essential coverage, a large employer cannot fulfill its employer mandate responsibility by offering an excepted benefit HRA.]

Relatively few employers offered ICHRAs for 2020, as the rules were finalized only a few months before most employers ran their open enrollment periods for 2020 coverage, and there wasn't time to get them up and running. But benefits managers have been working to roll out ICHRA platforms for 2021, and it's widely expected that they will be more common in future years.

While QSEHRAs can only be offered if the employer doesn't offer any group health insurance at all, the new rules allow employers to offer some employees a group health plan, while offering others an HRA that can be used to reimburse individual market premiums. The distinction must be based on bonafide employee classifications—for example, full-time versus part-time employees— and employees cannot be offered an option of either a group plan or an HRA. And no class of employees can be offered a choice between a group health plan and an individual coverage HRA (in other words, the employer has to make the choice of which option to offer to each class of employees).

In addition, the final rule stipulates that if a class of employees is offered an individual coverage HRA, it has to include a minimum number of employees (at least 10 if the business has fewer than 100 employees; at least 10% of employees if the business has between 100 and 200 employees, and at least 20 employees if the business has 200+ employees). This helps to prevent adverse selection (for the individual market) that could arise if a business were to, for example, have only a handful of employees who happen to be older/sicker, etc. than average—but who also happen to be a bonafide class of workers—and opt to transfer those workers to the individual market via an individual coverage HRA in order to save money on the group's health plan.

As is the case with QSEHRAs, there is a somewhat complex interaction between premium subsidy eligibility and individual coverage HRAs. But there are some important differences: A person can receive a QSEHRA benefit and a premium subsidy, depending on the circumstances, but cannot receive both a premium subsidy and an ICHRA benefit. Enrollees will need to ensure that they understand the details regarding their eligibility for premium subsidies in the exchange—and how that eligibility is affected if their employer offers an individual coverage HRA.

Unlike QSEHRAs, the final rule for individual coverage HRAs does not limit how much employers can reimburse employees for their individual market coverage. Businesses have to be consistent in terms of the amounts they offer to members of a class of employees, and although reimbursement amounts can vary based on the employee's age, the age-based adjustment to reimbursement amounts can't vary by more than a 3:1 ratio.

The final rule stated that 1.1 million people were expected to receive ICHRA benefits in 2020, and that number is expected to grow to more than 11 million people by 2029.

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Article Sources
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