As more and more small employers adopt health insurance reimbursement strategies (aka health reimbursement arrangements), a common question from employers and advisors is about compliance - what laws, regulations, and tax codes allow employers to reimburse employees’ health insurance tax-free?
The answer is there are seven key rules that allow, and shape, health insurance reimbursement today.
Here is a timeline of health insurance reimbursement compliance from 1954 to today.
1954: Section 105 Added to the Internal Revenue Code
In 1954, Section 105 was added to the Internal Revenue Code (IRC). IRC Section 105 allows an employer to offer a plan to reimburse employees’ qualified medical expenses, including insurance premiums. Under Section 105, amounts received are excluded from employees’ income.
1961: Revenue Ruling 61-146
In 1961, Revenue Ruling 61-146 was issued allowing an employer to pay for or reimburse an employee’s medical expenses tax-free, under IRC Section 106. Revenue Ruling 61-146 set the stage for Employer Payment Plans, where an employer pays directly or reimburses directly for health insurance premiums.
1974: Employee Retirement Income Security Act (ERISA)
In 1974, ERISA was established. ERISA implemented fair and equal treatment requirements for employee benefit plans, including the requirement for formal plan documents. Today, all formal health insurance reimbursement plans must comply with ERISA laws.
1996: Health Insurance Portability and Accountability Act (HIPAA)
In 1996, HIPAA Privacy Law was established. HIPAA protects employees’ medically private health information. Today, all formal health insurance reimbursement plans must comply with HIPAA privacy rules.
2002: Notice 2002-45, Health Reimbursement Arrangements
In 2002, the IRS issued Notice 2002-45 which confirmed an employer can offer a plan to reimburse employees’ qualified medical expenses, including insurance premiums. The Notice provided rules and guidance for Health Reimbursement Arrangements (HRAs) including the tax treatment, benefits, and coverage under an HRA.
2010: Affordable Care Act (ACA)
In 2010, the ACA was signed into law. Among other things, the ACA requires group health plans (including health insurance reimbursement plans) to comply with new requirements effective 2014.
2013: Notice 2013-54
In 2013, the IRS and Department of Labor issued Notice 2013-54 which confirmed that all group health plans, including health insurance reimbursement plans, may not place limits on essential health benefits and must cover basic preventive healthcare services without cost sharing.
The Notice confirmed that Employer Payment Plans and certain types of HRAs will not comply with the ACA Market Reforms starting January 1, 2014. If an employer uses a reimbursement arrangement that fails to comply with the Market Reforms, the employer may be subject to a $100/day excise tax per applicable employee. Penalties start July 1, 2015.
To avoid penalties, employers reimbursing employees for health insurance should adopt a compliant reimbursement plan, such as a qualified small employer HRA (QSEHRA).
Since 1954 there have been a series of laws, tax codes, and reforms impacting how employers can reimburse employees for health insurance. Just remember, a health insurance reimbursement plan is considered a group health plan and, as such, needs to comply with all applicable rules and guidelines including IRS, ERISA, HIPAA, and ACA rules. Employers may use compliant HRA software, such as PeopleKeep, to reimburse employees for individual health insurance.
Do you have questions about compliance and health insurance reimbursement? Leave a comment below and we’ll help answer.