The ObamaCare Solution - A Business Expense Account for Healthcare

For most businesses, the solution to ObamaCare is simple: Offer a “Business Expense Account” for Healthcare. Employers can get out of the health insurance business, and simply give select employees monthly allowances to spend on their own health insurance policy in a state health insurance exchange using a Section 105 medical reimbursement plan (aka Healthcare Reimbursement Plan or HRP). If you understand how business expense accounts work, you will understand how this health care approach works as well.

How Business Expense Accounts Work

With business expense accounts, companies reimburse employees for business-related expenses 100% tax-free. These expenses include travel, entertainment, gifts, and other expenses related to the employer's business activity. To maintain prefered tax treatment, the business expense account plan must be administered to meet certain requirements of the IRS:

1. There must be a business connection;

2. Expenses must be substantiated (usually through a receipt); and

3. Any amount received by an employee in excess of actual expenses must be returned to the employer.

Substantiation means that the employer must be able to identify the specific nature of each expense and determine that the expense was business-related. Expenses may not be aggregated into broad categories, and they may not be reported using vague terminology.

If the company's business expense account plan meets the above requirements, then all money received by an employee under the plan is excluded from the employee's gross income and deductible to the business!

HRPs: A Business Expense Account for Healthcare

So, what is a Healthcare Reimbursement Plan (HRP) and how can it be used like a business expense account for healthcare? 

Using a Section 105 HRP, companies reimburse employees for individual health insurance premiums. To maintain prefered tax treatment and stay compliant with various regulations, the plan must be formally administered to meet certain requirements of the IRS:

1. They funds must reimburse qualified health insurance premium expenses;

2. Expenses must be substantiated (usually through a payment receipt or bill); and

3. Any amount received by an employee in excess of actual expenses must be returned to the employer.

Substantiation means that the employer must be able to identify the specific nature of each expense and determine that the expense was medically-related. Expenses may not be aggregated into broad categories, and they may not be reported using vague terminology.

If the company's Section 105 plan meets the above requirements, then all money received by an employee under the plan is excluded from the employee's gross income and deductible to the business!

It’s really that simple, but there’s a slight catch: “HIPAA”.

Unlike Business Expense Accounts, HRPs are Subject to the HIPAA Privacy Rule

The catch is that Section 105 HRPs, unlike business expense accounts, are subject to the HIPAA Privacy Rule. In order to administer a Section 105 plan correctly, the employer must ensure that the employee reimbursement requests are substantiated in compliance with HIPAA. As a result, virtually all companies use a third-party to handle the premium expense substantiation process.

So, How Can a Business Offer an HRP?

To offer this type of plan, the business should select a defined contribution software provider and follow the below steps:

1. Setup the Plan -  This is when the business determines employee eligibility and the monthly HRP allowance amounts.

   Employer Administration Time: 15 minutes online.

2. Add Eligible Employees - This is when the business enrolls employees into the plan and distributes IRS/ERISA/ACA required plan documents, SPDs and notices to each eligible employee.

   Employer Administration Time: 15 minutes online.

3. Let Employees Purchase Their Own Individual Health Insurance Plan - Each employee chooses and pays for his or her own individual health insurance policy and submits proper documentation for reimbursement.

   Employer Administration Time: 0 minutes.

4. Substantiate the Expense in Compliance with HIPAA - A HIPAA-compliant claims processor should review the reimbursement requests.

   Employer Administration Time: 0 minutes.

5. Reimburse Employees - Once reimbursements are substantiated, the business should reimburse each employee for the approved amount up to the available HRP balance.

   Employer Administration Time: 1-5 minutes online per month.
   

Employees no longer need employers to purchase high-cost health insurance, and, starting in 2014, employees earning less than 400% of the FPL (~$94,000 for a family of four in 2013) per year who purchase a personal policy in a state health insurance exchange will receive a large federal subsidy on their premium if their company doesn’t offer a group health insurance plan.