New FAQs Released by DOL Take Sharper Aim at Premium Reimbursement Arrangements for Individual Health Insurance, Marketplace Dumping
The DOL released a new set of Frequently Asked Questions (“FAQs”) on November 6, 2014, which seek to clarify its prior guidance with respect to the treatment of certain premium reimbursement arrangements under the Affordable Care Act (the “ACA”) and which could have a significant impact on how certain employers assist employees with their health insurance costs. In addition to providing that employers may not integrate a premium reimbursement arrangement with otherwise compliant health coverage purchased on the individual to satisfy the ACA’s market reform requirements, the new guidance also is directed at invalidating an increasingly popular concept known as “marketplace dumping.”
I. Premium Reimbursement Arrangements
Prior to the FAQs, previous guidance released by the DOL, HHS, and IRS (collectively, the “Agencies”) stated that employers could not offer employees cash on a pre-tax basis to reimburse the employee for the purchase of insurance coverage on the individual marketplace. The Agencies reasoned that such an arrangement (often known as an “employer payment plan”) would be considered a group health plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees. By virtue of such arrangement’s classification as a group health plan, the arrangement would be subject to, and generally fail to comply with, the ACA’s market reform provisions, and would subject the employer to substantial penalties for maintaining a non-compliant group health plan.
In its prior guidance, the IRS left open the issue of whether an after-tax reimbursement for the purchase of coverage in the individual marketplace was also considered to be a group health plan, and therefore in violation of the ACA’s market reform requirements. The new FAQs, however, clarify the DOL’s position that such arrangement is a group health plan subject to the market reform requirements, whether or not the employer provides the reimbursement on a before-tax or after-tax basis. These types of premium reimbursement plans, by virtue of their classification by the DOL as group health plans, would fail to satisfy the ACA’s various market reform requirements (such as the prohibition on annual limits and the requirements to provide certain preventative services without cost sharing) and could subject the employer to substantial excise tax penalties for its failure to maintain an ACA-compliant group health care plan. The penalties for maintaining a noncompliant group health care plan amount to $100 per day per applicable employee (or $36,500 per year, per employee).
II. Marketplace Dumping
Prior to the DOL’s release of its new FAQs, some benefit product companies were promoting an increasingly popular scheme known as “marketplace dumping” whereby an employer would incentivize its employees with high clams risk to forego enrolling in the employer’s group health plan by offering them cash in lieu of coverage. According to the DOL, such schemes are impermissible because they violate the nondiscrimination provisions of ERISA for two reasons. First, by requiring the high-risk employee to forego the cash incentive to enroll in the group health plan, the DOL argues that the employee’s premium is actually increased because of the employee’s inability to elect to receive the otherwise available cash incentive. Second, the scheme discourages enrollment in a group health plan and is therefore not merely benign discrimination that is helpful to employees with adverse health factors, as allowable under ERISA’s nondiscrimination provisions.
III. Employer Takeaways
In view of the positions taken by the DOL in its most recent set of FAQs, employers should analyze their current health care benefit arrangements to determine whether their arrangements involve after-tax premium arrangements that have been identified as noncompliant health plan arrangements, or whether they sponsor an arrangement that could be classified as “marketplace dumping” under the DOL’s stated interpretations. It should be noted that the DOL’s positions on premium reimbursement arrangements as well as “marketplace dumping” schemes apply to both small and large employers, as defined in the ACA. All employers that have implemented or that have considered implementing either of these strategies should considering alternative arrangements for assisting their employees with the costs of health coverage in order to avoid substantial excise tax penalties for providing a noncompliant health plan.