Does your business or employer pay for, or reimburse employees for, individual health insurance coverage? Did you know that as a result of the Affordable Care Act, such arrangements were prohibited beginning Jan. 1, 2014?

On Nov. 6, 2014, the U.S. Department of Labor (DOL) issued a new series of frequently asked questions (FAQs) based upon previously released guidance confirming that under the Affordable Care Act (ACA), certain employer health care arrangements, such as Employer Payment Plans, which are considered group health plans under the ACA, may be prohibited no matter if employers are paying employees’ individual premiums with pre-tax or after-tax dollars.

Previously, in May 2014, the IRS issued a FAQ that addressed the employer’s reimbursement of employee paid premiums for individual coverage including coverage obtained through an exchange or the Marketplace. In the FAQ, the IRS made it clear that employers were prohibited from using pre-tax dollars to pay for individual premiums because such would constitute a prohibited Employer Payment Plan. See the previous article on the IRS FAQ here.

The DOL’s recent guidance goes one step further in suggesting that even reimbursements using after-tax dollars (in addition to pre-tax reimbursements) would violate the ACA and subject the employer to the stiff penalties in the form of an excise tax. The DOL FAQ reads as follows and can be found in its original form here.

Q1: My employer offers employees cash to reimburse the purchase of an individual market policy. Does this arrangement comply with the market reforms?

No. If the employer uses an arrangement that provides cash reimbursement for the purchase of an individual market policy, the employer’s payment arrangement is part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax to the employee. Therefore, the arrangement is group health plan coverage within the meaning of Code section 9832(a), Employee Retirement Income Security Act (ERISA) section 733(a) and PHS Act section 2791(a), and is subject to the market reform provisions of the Affordable Care Act applicable to group health plans. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code. Under the Departments’ prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy. (emphasis added)

Therefore, if an employer fails to satisfy the ACA market reforms by continuing to operate an Employer Payment Plan paying individual premiums with either pre-tax or after-tax dollars, the employer may be subject to the excise tax of up to $100 per day, per employee (potentially $36,500 per employee, per year).

Payroll Practice Exception

In certain circumstances, employees who have their own individual coverage may wish to have deductions made from their wages paid directly to the insurance provider. An Employer Payment Plan, as that term is used in the DOL’s Technical Release, 2013-03, “does not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage.” That is, individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of the employee without establishing a group health plan if the standards of the DOL’s regulation at 29 CFR 2510.3-1(j) are met.

Employers are advised to tread carefully here, as the indicia of an employer requiring such an arrangement could fall within the realm of a prohibited plan. As a result, such an arrangement should be carefully documented.

Plans With Fewer Than Two Participants

Currently, there is guidance from both the IRS and DOL that indicates that a “group health plan,” as such is defined under the ACA, may not be subject to the market reforms and may continue to be valid under the ACA if there is only one employee participating in the plan.¹ This would potentially allow smaller businesses, say where there is only one employee who may also be a shareholder, to continue in a plan if he or she were the sole participant. While much of the guidance from both the IRS and DOL specifically addresses single-employee coverage plans in the context of those provided for retirees,² there is nothing in the currently available guidance that would indicate that such an exception would not also apply outside a retiree situation; although, the risk of non-compliance may warrant waiting for further guidance.

¹I.R.S. Notice 2013-54, II.D.1., provides, “In accordance with Code § 9831(a)(2) and ERISA § 732(a), the market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year …”

²See preamble to Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan under the Patient Protection and Affordable Care Act, 75 Fed. Reg. 34538, 34539 (June 17, 2010). See also Affordable Care Act Implementation FAQs Part III, Question 1.