As small and medium sized employers evaluate health insurance, they are seeing the new advantages of individual health insurance including lower costs, more choice, portability, and guaranteed-issue coverage. As such, it is natural to ask "Can we help employees pay for individual health insurance?"
The answer is yes, but don't start paying for employees' individual health insurance premiums directly. Instead, use a formal vehicle such as a compliant Section 105 Healthcare Reimbursement Plan (HRP) or other ACA/IRS/HIPAA/ERISA-qualified vehicle (e.g. Section 125).
Let's take a closer look at these considerations.
Why Employers Should Not Pay Directly for Employees' Individual Health Insurance
There are two major reasons an employer should never pay for its employees' individual health insurance plans directly:
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Paying for individual health insurance without a qualified Section 105 Plan causes the employer to "endorse" the individual health insurance plans.
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Paying for individual health insurance without a qualified Section 105 Plan causes the payments to become taxable income to the employees.
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, including individual health insurance. 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.
How to Help Employees Pay for Individual Health Insurance
The most popular solution to help employees pay for individual health insurance is to set up a Section 105 Healthcare Reimbursement Plan.
A Healthcare Reimbursement Plan (HRP) is an employer-funded, tax advantaged employer health benefit plan that can reimburse employees for individual health insurance premiums.
An HRP is designed specifically to comply with the ERISA and HIPAA rules discussed above, as well as IRS, COBRA, and new Affordable Care Act (ACA) rules.
Most employers set up the HRP through a to make sure the plan is set up and administered in a compliant way.
To summarize, using an HRP allows an employer to reimburse individual health insurance tax-free, comply with the various regulations, help employees pay for individual health insurance, and offer a valued health benefits package for recruiting and retention.
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