In 2012, we wrote a popular article "Why Businesses Should Never Pay Individual Health Insurance Premiums" (see that article here). With the Affordable Care Act (ACA) and associated regulations, however, there have been a few changes.
This updated article addresses 1) why businesses should (still) never pay for employees' personal health insurance premiums directly, and 2) what vehicle businesses can use to reimburse personal health insurance premiums in 2014 and beyond.
In summary, federal regulations prohibit businesses from paying directly for employees' personal health insurance premiums, outside of a Section 105 Healthcare Reimbursement Plan (HRP) or other ACA/IRS/HIPAA/ERISA-qualified vehicle (e.g. Section 125).
Some businesses might want to pay directly for an employees' individual health insurance plans without utilizing an ERISA and HIPAA-compliant Section 105 Plan, but doing so may put the business out of compliance with federal regulations and may increase the business's (and employees') tax liability.
Why Businesses Should Never Pay Personal Health Insurance Premiums
There are two major reasons an employer should never pay for its employees' individual health insurance plans directly:
Paying for Personal Health Insurance without a qualified Section 105 Plan Causes the Employer to "Endorse" the Personal Health Insurance Plans
Paying for Personal Health Insurance without a Section 105 Plan Causes the Payments to Become Taxable Income to the Employees
When an employer pays directly for an employees' personal health insurance plan, they effectively endorse each employees' personal 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 personal 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 personal 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.
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 Section 105 provider will ensure compliance with federal law.
Furthermore, if an employer were able to technically comply with HIPAA and ERISA in paying for individual health insurance premiums, such payments would be taxable income to employees unless they were reimbursed through an Section 105 Plan or other IRS-qualified tax-free vehicle.
Using a Section 105 Plan an employer can give employees effectively up to twice as much in health benefits through tax savings than if the employee were to pay for such expenses themselves.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 Section 105 Plan will ensure the tax deductibility of employee's individual health insurance premiums.
See related articles:
- Why Section 105 Plans are Better Than Section 125 Plans (Post-2014)
- Can Employers Reimburse Employees' Individual Health Insurance in 2014?
- How Healthcare Reimbursement Plans (HRPs) Work With New "Market Reforms"