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December 16, 2014

Guidance on Reimbursing Individual Health Insurance Premiums

This Capital Checkup summarizes recent guidance from the Departments of Treasury, Labor, and Health and Human Services, which are responsible for implementing the Affordable Care Act1 (collectively, the “Departments”), on premium-reimbursement arrangements. The Departments issued the guidance in November 2014 in the form of an answer to a frequently asked question (FAQ).2

Starting in 2013, the Departments have released several answers to FAQs addressing certain reimbursement arrangements through which plan sponsors reimburse participants for medical expenses and/or health premiums.3 In the view of the Departments, stand-alone health reimbursement arrangements (i.e., those not paired with an underlying group health plan) violate various market-reform provisions under the Affordable Care Act, including the prohibition on annual dollar limits. Arrangements that reimburse participants for the cost of individual market health insurance policies also violate the market-reform provisions.

The latest answer to an FAQ reinforces earlier guidance and states that any arrangement through which a plan sponsor pays for a participant’s individual market insurance policy (i.e., a non-group policy) or reimburses a participant for the cost of such an individual market policy is prohibited. This is the case even if the plan reimburses participants on an after-tax basis. The rationale is that such an arrangement is a group health plan that violates the market-reform provisions of the Affordable Care Act. Violations of these market reforms can trigger penalties of up to $100 per day for each affected individual.

Although not addressed in the latest guidance, stand-alone reimbursement arrangements, as well as arrangements that reimburse individual market insurance premiums, are permissible in the context of a separate retiree-only plan. The Departments have not released guidance on what must be done to create or maintain a separate retiree-only plan, but at a minimum this will require separate plan documents and separate financial accounting.

Implications for Plan Sponsors

Plan sponsors offering premium-reimbursement arrangements or contemplating them should review the guidance carefully to ensure that their offerings are consistent with the guidance. Such arrangements will not be allowed for active employees or for retirees in a plan with actives, but, if structured properly, would be permitted for retirees in a separate retiree-only plan. Fund counsel should be consulted on the steps necessary to create a separate retiree-only plan.

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As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their legal counsel for authoritative advice on the interpretation and application of the Affordable Care Act and related guidance, including the guidance summarized in this Capital Checkup. Segal Consulting can be retained to work with plan sponsors and their fund council on compliance issues.

 

1 The Affordable Care Act is the shorthand name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-48, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup.)

2 This answer to an FAQ is available on the Department of Labor website. (Return to the Capital Checkup.)

3 See, for example, Segal Consulting’s October 10, 2013 Capital Checkup, “New Guidance Requires Immediate Action by Sponsors of Health Reimbursement Arrangements.” (Return to the Capital Checkup.)

 

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