Fewer than 50 percent of small businesses offer employee health insurance, largely because of the cost. That's over 2.3 million small businesses that don't offer insurance. Due to the exponential rise in group health insurance premiums, businesses are seeking alternatives. The prevailing alternative is to reimburse employees for individual health insurance.
In this new Zane Benefits Whiteboard Session, J.D. Cleary outlines how employers can reimburse employees tax-free for individual health insurance, while keeping the business and employees in compliance.
For reference, here's a snapshot of this week's whiteboard:
Want to learn more? Download this Compliance 101 Guide
Video Transcription
Welcome, and thank you for attending today’s Zane Benefits Whiteboard Session where today’s topic is Compliance 101. My name is JD Cleary and I’m really happy to be presenting today.
The reason we are going to discuss Compliance 101 is the fact that employers in this country are really struggling with offering group health insurance, or your traditional employer-sponsored group health plan to their employees. And, they are seeking alternatives that involve taking advantage of individual health insurance in their state.
The three primary ways they are trying to take advantage of individual health insurance for employees is by providing a monthly stipend, where the employer maybe grosses up employees salary, or just gives employees money for their health insurance.
Two, the employer might choose to provide a taxable premium reimbursement plan. Something formal, but where the employee has to pay taxes on the money they get from their employer.
Third, and as you can imagine, the most advantageous, is a tax-free premium reimbursement plan. Again, a formal plan where the employer has put something in writing to say, hey employees, here is our plan to reimburse you for your individual health insurance, but on a tax-free basis. So, employees do not pay taxes on the money they get from their employer.
This tax-free premium reimbursement plan is also known as a self-insured medical reimbursement plan. It is the whole reason we want to talk about compliance, because if an employer is going to offer a tax-free premium reimbursement plan - or a self-insured medical reimbursement plan - there are some key components they need to be aware of, as it relates to compliance.
The three main compliance considerations are number one - this self-insured medical reimbursement plan is a group health plan. Now, it’s not a fully-insured group health insurance plan, but it is a group health plan under ERISA, and that is important.
It’s a tax-free benefit. So, if employers are going to reimburse employees tax-free for their individual health insurance, they have got to be sure they are following IRS guidelines in the code. And, since we agreed here that it is a group health plan, the plan has to follow important guidelines outlined in federal code in addition to the tax pieces that we’ll cover in a second.
IRS requirements say that the plan has to be fair. That you can’t discriminate in favor of highly compensated individuals. It must be designed to meet discrimination testing. And, it has to have legal plan documents associated with it.
HIPAA medical privacy law. Since an employee is buying individual health insurance, and that proof of health insurance payment is governed by medical privacy law, an employer has got to be conscious of and put into place the correct medical privacy practices to handle that HIPAA protected information.
COBRA. If you’re a business considering a self-insured medical reimbursement plan and you have more than 20 employees, if an employee leaves the company they have certain requirements under COBRA to be notified.
We agreed that it is an ERISA group health plan, so it is an employee welfare benefit plan under ERISA. It has to follow certain federal guidelines so the employer does not endorse employees’ individual health insurance plans. Simply stated, the employer can’t pay for the employee’s health insurance plan, they have to pay for it on their own.
Finally here is the Affordable Care Act. There are all kinds of new requirements that apply to all group health plans. And since all group health plans must comply with key components of the ACA - namely summary of benefits and coverages, no limits on any essential health benefits, coverage for preventive care services - all of these pieces must be written into that plan document to ensure compliance.
Let’s talk about the tax code for a second and how these relate to the self-insured medical reimbursement plan.
IRS Section 105 is the part of the tax code that allows an employee to receive reimbursements from this plan. And, remember the self-insured medical reimbursement plan is a formal plan, and the plan is what reimburses employees. Employees are able to receive those reimbursements for their individual health insurance purchases as excludable from income because of Section 105 - it’s a beautiful part of the tax code.
And, they are able to receive these reimbursements under a 105 plan for anything that’s defined as medical care in IRS 213. IRS 213 says any of these types of expenditures are able to be reimbursed tax-free, or an employee may be able to take a personal tax deduction for it. Well, insurance is specified in IRS Section 213(d) as a qualified medical expense for this purpose.
IRS Section 106 is an interesting part of the code that says that the value of this employee benefit plan - so this employer offering a self-insured medical reimbursement plan -- that there is a certain value tied to that benefit. The employee is able to receive that benefit as non-taxable because of Section 106.
And finally, IRS Section 162 is the part of the code that allows the employer to write off the reimbursement as a valid business deduction. So just like an employer would do that with any contributions they make toward group health insurance or a fully insured group health plan, same thing here. Employer reimburses an employee tax-free for their individual health insurance premium, which is a qualified expense under 213, the employer gets to write it off because of 162.
The beauty of all of this coming all together at once is the employer can get out of group health insurance, can still offer a great benefit that keeps all the tax advantages, previously associated with group health insurance. And, if they do all this the right way, they have a compliant plan that will pass audit and they are doing everything correctly, and employees will love it.
That concludes our Whiteboard Session for today. Thank you very much for attending. Hope you enjoyed it.
We'll be posting new Whiteboard Sessions on a regular basis. What topic would you like to see next? Leave a comment or question below.
