New Guidance on Tax-Free Reimbursement of Individual Health Insurance

First, the bad news

Under the interim final rules for the PHS Act Section 2711 annual limit requirements, a flexible spending arrangement as defined in IRC Section 106(c)2 is exempted. Many sponsors of stand-alone HRAs have been using this exemption to ensure their plan complies with the PHS Act Section 2711 annual limit and PHS Act Section 2713 preventive care requirements.

As part of the Technical Release, Health and Human Services (HHS) has reversed its position that flexible spending arrangements as defined above are exempted from the 2711 annual limit requirements.

According to the Technical Release, this change goes into effect for plan years beginning on and after January 1, 2014. In other words, the section 106(c)2 flexible spending arrangement exemption will still be available for plans with plan years beginning before January 1, 2014. This gives ample time for existing sponsors of stand-alone HRAs to ensure compliance.

Now, the good news

Employers can still reimburse employees for individual health insurance premiums.

For the first time, the Department of Labor, the Department of Treasury, and Health and Human Services have coordinated to issue formal confirmation that employers are 100% allowed to reimburse individual health insurance premiums tax-free under the tax code. This is a MAJOR positive.

We repeat - employers are still allowed to reimburse employees tax-free for individual health insurance premiums.

What is the solution for plan years beginning before January 1st, 2014?

According to the Technical Release, the new guidance is applicable for plans with plan years beginning on and after January 1, 2014. So, current stand-alone HRAs beginning a new plan year December 1st, 2013 may be able to delay the impact of this technical release for another year.

However, this may only be a short-term solution.

What is the solution for plan years beginning on or after January 1st, 2014?

For plan years beginning on or after January 1st, 2014, one solution is to adopt a limited Healthcare Reimbursement Plan (HRP).

The HRP is structured to only reimburse:

1. Health insurance premiums up to a specified monthly healthcare allowance,

2. Preventive care as required by PHS Act Section 2713 at 100% without cost-sharing.

This structure ensures the HRP complies with the PHS Act 2711 annual limit requirements and the PHS Act 2713 preventive care requirements as outlined in the Technical Release.

Additionally, care must be taken in the design and administration of the HRP to ensure the plan does not meet the definition of an eligible employer-sponsored plan in IRC Section 5000A and consequently qualify as minimum essential coverage. This ensures employees participating in the HRP are able to receive a tax subsidy via the new health insurance marketplaces assuming they meet additional eligibility criteria.

Conclusion / Next Steps

With the Departments all in agreement, everyone should be excited there is finally a clean, final process for employers to reimburse employees for individual policies that are guaranteed-issue.

Sponsors of stand-alone HRAs should begin preparing to convert their plan to an HRP for plan years beginning after 2014.

Finally, our nation can rid itself of one-size-fits-all employer group health insurance policies that hamper businesses, employees and their families.

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