Some companies might want to pay directly for an employee's individual health insurance plans without utilizing an ERISA and HIPAA-compliant defined contribution health plan, but doing so will put the employer out of compliance with federal regulations and increase the employer's
(and employee's) tax liability.
There are two major reasons an employer should never pay for its employees' individual health insurance plan:
Federal Compliance Issues
Paying for Individual Health Insurance without a Defined Contribution Plan Causes the Employer to "Endorse" the Individual Health Insurance Plans
When an employer pays directly for an individual health insurance plan, they effectively endorse each employee's individual insurance plan as part of an employer-sponsored group health benefit offering. In other words, according to federal law, the employer is treating the individual plan as part of an employee welfare benefit plan regulated by ERISA. Because most individual health insurance plans, do not meet minimum ERISA group plan requirements, the employer is out of compliance.
Separately, an employer is not allowed to know the details of employees HIPAA-protected medical expenses. Because most individual health insurance costs are based on an employee's health, the health insurance details must be HIPAA protected. When an employer pays for the individual policy, they can violate HIPAA-privacy requirements because they know the details of a HIPAA-protected employee expense.
The federal government has guidelines for employers who want to contribute to employee's individual health insurance premiums without violating the HIPAA and ERISA regulations.
An ERISA and HIPAA-compliant defined contribution health plan will ensure compliance with federal law.
Increased Tax Liability
Paying for Individual Health Insurance without a Defined Contribution Plan Causes the Payments to Become Taxable Income to the Employees
If an employer pays for employee's individual health insurance premiums without utilizing a defined contribution health plan, such payments must be reported as taxable income to the employees.
The IRS requires that legal plan documents be established in order for employees to deduct the individual health insurance premiums from taxable income on the annual W-2.
An IRS-compliant defined contribution health plan will ensure the tax deductibility of employee's individual health insurance premiums.