HOW IT WORKS FOR EMPLOYEES
9. What is Individual Health Insurance?
Individual health insurance is a type of policy an employee purchases for himself and/or his family - just like car insurance. Employees own the policy and may take it with them if they
leave the company. Employees pay for their policy with their own money, and can use their HRP to reimburse themselves for the premium (or a portion of the premium).
10. Where Do Employees Purchase Health Insurance?
Employees may purchase insurance through a licensed health insurance agent, online, or through the Health Insurance Marketplace in their state. Compared to a few years ago, buying an individual health insurance policy is a lot easier. Employees are no longer asked medical history information on the application, and cannot be denied or charged more because of a pre-existing condition.
11. What Types of Health Insurance Can Be Reimbursed?
The IRS determines which types of health insurance premiums may be reimbursed tax-free. Employees may use their HRP to be reimbursed for the following types of insurance premiums, provided they were not already reimbursed or paid for with pre-tax dollars:
• Major medical individual health insurance premiums
• Limited benefit individual health insurance premiums
• Dental care and vision care premiums
• Qualified ancillary premiums (e.g. accident policies)
• Medicare Part A or B, Medicare HMO, and employer-sponsored health insurance premiums
• Medicare Advantage and Supplement premiums
• COBRA premiums
• Long-term care premiums
Common health insurance policy premiums not reimbursable tax-free include:
• Life insurance policies
• Policies providing payment for loss of earnings (“income replacement”), such as most critical illness and disability policies
• Policies for loss of life, limb, sight, etc.
• Policies that pay a guaranteed amount each week for a stated number of weeks if you are hospitalized for sickness or injury
• Health care ministry sharing program donations/premiums (“medi-share” or medical share plans)
For more information, see IRS Publication 502.
12. Does a Healthcare Reimbursement Plan Count as Health Insurance Coverage?
No. The company is offering a reimbursement plan, not health insurance coverage.
An HRP alone does not satisfy the individual mandate for employees, and does not satisfy the employer mandate for larger employers.
13. How Much Does Individual Health Insurance Cost?
A common misconception about individual health insurance is that it costs more than employer-based (“group”) health insurance. When in fact, on average, individual health
insurance costs up to 60 percent less than comparable coverage on the group market.
There are a number of variables that play into the cost of individual health insurance. The national average in 2014 was $346/month for single coverage and $667/month for
family coverage.
These national averages, however, do not take into consideration discounts one might be eligible for via the premium tax credits.
In the federally-run Marketplace (healthcare.gov), 87 percent of those who selected a health plan in 2014 received premium tax credits, and paid an average of $82/month
(HHS, 2014).
Here is a look at average individual health insurance costs versus average group health insurance costs in 2014 (national averages).
14. Can Employees Access Marketplace Health Plans and Premium Tax Credits?
Yes. Having an HRP does not disqualify employees and their families from receiving premium tax credits. Employees are eligible for premium tax credits if they meet certain income requirements and do not have access to eligible employer-provided or government-provided health insurance coverage.
Households earning less than $47,080 a year in 2015 (single) or $97,000 a year (family of four) are eligible.
DESIGNING & ADMINISTERING THE PLAN
15. Who Can Participate in the Reimbursement Plan?
Employee eligibility is based on:
• Employee Classes (defined by the company)
• Waiting Period (max 90 days)
16. Can Business Owners Participate in the Plan?
Business owners can always participate in the plan, however as the chart below shows, tax benefits are limited for some types of owners.
Health benefits are an important tool for attracting and retaining high quality talent. This is true for start-ups and small businesses, as well as Fortune 500 companies. And yet, while nearly all (99 percent) of large employers offer employees health insurance, only half (54 percent) of small and medium-sized businesses offer coverage today (Kaiser/HRET 2015).
Defined Contribution: Drop Group Employer Coverage and Switch to Individual Health Insurance
It’s not that small companies don’t value investing in health benefits - most do. Rather, continual cost increases and restrictive eligibility requirements create significant barriers for offering or keeping coverage.
So, where does that leave us today? As small companies explore ways to offer affordable and flexible benefits, one popular solution is to reimburse premiums, instead of paying them.
Individual health insurance reimbursement allows companies to offer health benefits on their own terms, without the cost or complications of traditional employer-provided health insurance.
As your company evaluates health benefits, it is common to have questions.
“How does individual health insurance reimbursement work for our company and employees? How does it compare to traditional employer health insurance coverage? How do we set up and administer a compliant plan?”
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35 Answers to Common Questions On
Individual Health Insurance Reimbursement
HEALTH BENEFIT BASICS
1. As a Small Company, What Health Insurance Options Do We Have?
As companies evaluate offering health benefits, there are two core ways to provide a contribution to employees’ healthcare.
The first option is to purchase a group health insurance policy to cover eligible employees and dependents. With group health insurance, the company selects and purchases a policy (or policies) and employees contribute toward the premium via a payroll deduction.
The second option is to offer a real dollar contribution toward employees’ health insurance premiums. With individual health insurance, each employee selects and purchases a policy and the company can contribute toward the premium via a healthcare reimbursement plan.
2. What is the Difference Between Group and Individual Health Insurance?
To help understand the differences between group and individual health insurance, here is a simple chart.
INDIVIDUAL HEALTH INSURANCE REIMBURSEMENT 101
Because of the advantages and affordability of modern individual health insurance, an increasingly popular small business approach is individual health insurance reimbursement.
How popular? By 2020, S&P Capital estimates 90 percent of American employees who currently receive health insurance through work could be shifted to individual health insurance and exchanges.
3. What is Individual Health Insurance Reimbursement?
Individual health insurance reimbursement is a health benefits strategy where the company reimburses premiums, instead of paying for them.
With this approach, the company sets up a tax-advantaged reimbursement plan to give employees a healthcare allowance to use on health insurance premiums. Think of it like a business expense account or gift card for health insurance.
Here is how it works.
• Step 1: Company establishes a formal reimbursement plan, setting eligibility criteria and monthly healthcare allowances.
• Step 2: Employees purchase their own health plan, with their own money.
• Step 3: Employees submit a reimbursement request.
• Step 4: A third party (ex: ZaneHealth) processes the request and notifies the company of the amount to reimburse employees.
• Step 5: The company reimburses employees for approved expense via payroll, check, or direct deposit.
4. What Type of Reimbursement Plan is Used?
Today, the most common plan is a Section 105 Healthcare Reimbursement Plan, or HRP. An HRP allows for compliant, tax-free reimbursement of individual health insurance.
For one-person organizations, a Health Reimbursement Arrangement (HRA) may also be a compliant option.
As an alternative to a formal plan, a company may offer employees a stipend (bonus or raise) to use on health insurance, but this must be treated as taxable income. With a stipend, the company should not ask employees to show proof of their health insurance to receive the stipend.
5. Is Reimbursement of Individual Health Insurance Still Allowed?
Yes! The tax code still allows for tax-free reimbursement of individual health insurance. Care must be taken, however, to use a compliant reimbursement plan such as an HRP. Employers who use a non-compliant reimbursement plan, who reimburse employees informally, or who pay directly for employees’ premiums may face penalties of up to
$100 per day, per employee.
6. What Healthcare Expenses May Be Reimbursed?
When using an HRP, employees may be reimbursed for health insurance premiums (up to their available balance) and basic preventive care services (unlimited).
The plan is structured to reimburse these types of expenses to comply with health reform guidelines.
7. How is the Plan Set Up and Administered?
To set up and administer a tax-free reimbursement plan such as an HRP, employers need:
• Formal Plan Documents
• A system to track, record, and substantiate reimbursements
• Compliance safeguards
Because of these requirements, most employers use a third-party administrator or self-service administration software to set up and administer the reimbursement plan. In addition to the plan, administration, and compliance requirements, a rock star vendor will:
• Help onboard and educate employees
• Provide health insurance resources to employees
• Allow Plan Document changes, without additional charges
• Provide real-time reporting
8. What are the Cost Savings of Individual Health Insurance Reimbursement?
On average, individual health insurance costs up to 60 percent less than comparable group health insurance premiums. As such, the company’s healthcare dollars are stretched farther. Exact rates will vary by location and employee demographics. Here is an example of typical cost savings (based off 2014 health insurance costs for the state of Illinois):
17. Is There a Minimum or Maximum Number of Participants that Must Enroll?
No. Companies of all sizes can offer individual health insurance reimbursement. Additionally, there are no required minimum participation requirements, and the company determines the eligibility requirements when they set up the benefit plan.
18. Can We Offer Different Benefits to Different Employees?
Yes. Companies may use Employee Classes to offer different benefit levels (allowances) to different types of employees. Allowances may also vary by family status. All employees in the same class should be treated equally.
Employee Classes are defined by the company and must be based on genuine job classifications such as job description, hours worked weekly, active versus retired status, geographic location, and membership in a collective bargaining agreement (e.g. union).
Employers may also give different benefits to employees based on the employee’s choice of plan (e.g., the HRP is only available to those opting out of the company’s group health insurance plan).
19. Can We Offer a Reimbursement Plan to Independent Contractors?
Yes, although contractors who do not earn W-2 wages must report reimbursements as taxable income.
20. Can We Offer a Reimbursement Plan and Group Health Insurance Coverage?
Yes. Companies can provide a group health insurance plan for some employees, and individual health insurance reimbursement to other employees.
21. Does the Company Have to Pre-Fund Allowances?
No. Companies can reimburse employees directly after their premium expense is substantiated. Pre-funding of third-party bank accounts is not required.
22. How Does a Company Track Allowances and Record Reimbursements?
Companies should establish a system to track allowances, reimbursements, balances, and supporting documentation. To make administration painless, and to comply with IRS documentation guidelines, most companies use an online self-administration software such as ZaneHealth.
23. What are the Tax Benefits to Employers and Employees?
For the employer, reimbursements are tax-deductible - the same way as premiums paid for a group insurance policy or other benefits expenses.
For employees, reimbursements are not included in employees’ income and not subject to income or payroll tax withholding. Internal Revenue Code (IRC) Section 105 allows qualified distributions from accident and health plans (including HRPs) to be excluded from income (“tax-free”). The tax benefits for some business owners, however, may be limited (see Question #16).
24. Can a Company Self-Administer the Plan?
Yes. Technically, a company can self-administer the reimbursement plan. However, because of the growing number of administrative and compliance requirements, most companies use a third-party or self-service administration software to set-up, manage, and administer the plan.
25. What are the Benefits of Using a Self-Service Administration Software?
For employers, the main benefits of using a self-service administration software, such as ZaneHealth, are time-savings, compliance assurance, and tax benefits. Additionally,
pre-funding of third-party bank accounts is not required with a software solution.
Self-service administration software adds value for employees, too. Employees receive an easy-to-use online website where they can view their benefit, receive health insurance information, request reimbursements, and access support.
COMPLIANCE QUESTIONS
26. Which Compliance Rules Must a Healthcare Reimbursement Plan Follow?
An HRP is a group health plan. As such, it is subject to the following rules:
• IRS Plan Document and non-discrimination rules
• Affordable Care Act “Market Reforms” and applicable administrative requirements
• ERISA rules for reimbursing individual health insurance policies, among other requirements
• HIPAA privacy rules
• COBRA, for plans with 20+ participants only
27. What is a Group Health Plan?
A group health plan is defined as an employee welfare benefit plan established or maintained by an employer or by an employee organization (such as a union), or both, that provides medical care for participants or their dependents directly or through insurance, reimbursement, or otherwise.
28. Which IRS Codes Allow for Tax-Free Reimbursement of Individual Health Insurance?
Tax-free reimbursement of individual health insurance is allowed under the following Internal Revenue Codes: IRC Section 105, IRC Section 106, IRC Section 213d, and IRC Section 162.
29. Does a Healthcare Reimbursement Plan Satisfy the Employer Mandate?
No. An HRP is not health insurance coverage and is not considered minimum essential coverage.
If an employer has over 50 FTE employees and does not provide affordable, minimum essential coverage to at least 95 percent of full-time workers in 2016, the company will pay a fee if/when an employee purchases subsidized coverage. Small employers (with fewer than 50 FTE employees) are not subject to the employer mandate.
30. How Does a Healthcare Reimbursement Plan Comply with PHS Act 2711 and PHS Act 2713 (“Market Reforms”), as outlined in IRS Notice 2013-54?
PHS Act 2713 requires all group health plans to cover basic preventive health services without employee cost-sharing.
To comply, an HRP reimburses basic preventive care.
PHS Act 2711 provides that no annual or lifetime limits may be placed on essential health benefits.
Health insurance premiums are not essential health benefits – so, an HRP can place a
“premium-specific” annual limit on premium reimbursements. Basic preventive health services
are an essential health benefit, and must be reimbursed on an unlimited basis. To comply, an
HRP covers unlimited preventive care services (typically, however, preventive care services are
covered fully by employee’s health insurance plan).
31. How Does the IRS FAQ (“Employer Health Care Arrangements”) Impact Healthcare Reimbursement Plans?
The May 13, 2014 IRS FAQ, titled “Employer Health Care Arrangements,” addresses Employer Payment Plans, as defined in IRS Notice 2013-54. The FAQ underscores Employer Payment Plans are not compliant with the Market Reforms and reiterates the importance of ensuring compliance with both the annual limit rules and the preventive care requirements (the “Market Reforms”) simultaneously. Structured correctly, an HRP complies with the Market Reforms.
32. Is a Healthcare Reimbursement Plan an Employer Payment Plan?
No. An HRP is not an Employer Payment Plan.
According to Notice 2013-54, an Employer Payment Plan is an arrangement under which an employer treats its direct contributions (either through payment or reimbursement) to individual health insurance premiums as tax-free. Unlike HRPs, Employer Payment Plans do not cover preventive health services.
33. How Does the Department of Labor (DOL) FAQ (“FAQs about Affordable Care Act Implementation (Part XXII)”) Impact Healthcare Reimbursement Plans?
The November 6, 2014 DOL FAQs, titled “FAQs about Affordable Care Act Implementation (Part XXII),” reconfirmed Premium Reimbursement Arrangements are group health plans. The FAQs also reiterate the positions outlined in Technical Release 2013-03 from 2013 and further emphasize the importance of ensuring health
insurance reimbursement programs comply with the Market Reforms. Structured correctly, an HRP complies with the Market Reforms.
34. What if Our Reimbursement Arrangement is Found to Be Out of Compliance?
Employers with a non-compliant reimbursement arrangement or an Employer Payment Plan may face penalties of up to $100/day per employee - up to $36,000 per year. To avoid penalties, offer a compliant HRP such as ZaneHealth.
35. How Can We Ensure Compliance with the Rules and Regulations?
Health benefits compliance and administration can feel overwhelming. But, it doesn’t have to be. To easily ensure compliance with the ever-changing rules and regulations, use an online self-service software administrator.
CONCLUSION
With this guide, you now understand the ins and outs of how a reimbursement strategy would work for your company and employees.
For small and growing companies, individual health insurance reimbursement offers an opportunity to offer great benefits while getting the cost of healthcare under control.
What now? Offering an individual health insurance reimbursement program is easy. Work with your health insurance advisor and/or a reimbursement software provider to:
• Identify your health benefits goals and budget
• Conduct a cost analysis
• Establish a timeline
• Start offering healthier health benefits, today!
ADDITIONAL QUESTIONS?
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