As small employers evaluate health benefit options, one popular approach is to offer employees reimbursement for individual health insurance. With individual health insurance reimbursement, the employer offers a Healthcare Reimbursement Plan (HRP) instead of offering a group health insurance plan.
With the complexities and changes surrounding the recent healthcare reforms, questions about compliance are bound to arise. The following FAQs address the five most commonly asked questions relating to compliance, individual health insurance reimbursement, and HRPs.
1) Is a Healthcare Reimbursement Plan (HRP) a Group Health Plan?
Yes. In simple terms, a plan or arrangement is considered a group health plan when an employer’s funds are conditioned on an employee’s medical expenses. Once a group health plan is established, the plan is required to comply with the ACA’s Market Reforms, in addition to other applicable requirements (ERISA, IRS, HIPAA, and COBRA). Because an HRP conditions reimbursement on a verified medical expense, it meets the definition of a group health plan.
2) How Does an HRP Comply with the Affordable Care Act’s “Market Reforms”?
The application of the ACA’s Market Reforms provided additional requirements for individual health insurance reimbursement. Among these new requirements, group health plans (including HRPs) are prohibited from placing annual or lifetime limits on essential health benefits (EHBs) and are required to cover basic preventive services without cost-sharing.
An HRP can comply with these requirements by limiting reimbursement to health insurance premiums (not an EHB) and basic preventive services (without cost-sharing).
Additionally, HRPs comply with other ACA requirements by allowing waiting periods up to 90 days, dependent coverage up to age 26, and providing participants with a Summary of Benefits and Coverage.
3) Is an HRP an Employer Payment Plan?
No. An Employer Payment Plan (EPP) is an informal practice where an employer reimburses or pays directly for an employee's medical expenses. Internal Revenue Code §106 allows these payments to be excluded from the employee’s gross wages. Essentially unchanged since the early 1960’s, this practice had been a popular means of providing a healthcare benefit.
However, due to its informal nature (no plan documents outlining plan design, expense eligibility, participation, etc.), this practice is incapable of complying with added and updated healthcare laws and regulations (IRS, ERISA, ACA, etc.). As a result, Employer Payment Plans have been identified by IRS Notice 2013-54 and 2015-17 as non-compliant with group health plan requirements.
On the other hand, an HRP is a formal plan under Internal Revenue Code §105. An HRP allows an employer to reimburse employees for their qualified medical expenses. To comply with the annual limit and preventive care requirements (the “Market Reforms”), the HRP limits reimbursement to health insurance premiums and certain preventive services. These reforms, among other plan design and administrative requirements are detailed in the IRS, ERISA, and ACA required HRP plan documents.
4) Are Reimbursements From an HRP Tax-free to Employees?
Yes. An HRP, under Internal Revenue Code §105, allows an employer to use tax-free dollars to reimburse employees for their qualified medical expenses, as defined by IRC §213(d). This includes amounts paid for insurance and basic preventive services. As a result, HRP reimbursements are not included in an employee’s gross wages (i.e. received tax-free).
5) Are Participants in an HRP Disqualified From the Premium Tax Credits?
No. In some cases, an employer’s offer of health coverage will affect an employee’s eligibility to access premium tax credits. For this to apply, the offered health plan has to meet certain standards, referred to as “Minimum Essential Coverage.” An HRP does not meet these standards. Specifically, an HRP is not an eligible employer-sponsored plan. As a result, HRP participants are allowed access to premium tax credits, if otherwise eligible.
As your small business evaluates an HRP and individual health insurance reimbursement, remember that an HRP is a group health plan (but not an Employer Payment Plan) and must comply with various federal rules and reforms. Additionally, employees receive reimbursements tax-free and are able to access premium tax credits, if otherwise eligible.
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