Defined Contribution: Drop Group Employer Coverage and Switch to Individual Health Insurance

Introduction

Health benefits are an important tool for attracting and keeping the best employees, but there’s a problem. For most small businesses, traditional group health insurance is out of reach.

Sound familiar? Currently, over 2.7 million U.S. small businesses do not offer traditional group health insurance. The primary reason? Cost. However, this doesn’t mean your small business has given up on health benefits altogether.

Just like businesses all over the nation, you’ve adopted a new health benefits strategy - reimbursing employees’ for their individual health insurance. With new rules and regulations, however, you need to go about it the right way.

Which leads us to the big question...

“Are we reimbursing employees’ individual health insurance the right way?”

The following chart will help you answer this question, and help you understand how you can
reimburse employees’ individual health insurance correctly.

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Chart: Are We Reimbursing Employees' Health Insurance Correctly?

A Quick Reference Chart

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CHART NAVIGATION Q&As

Unsure how to navigate the chart? These four questions will help guide you.

Q1. What is a “formal reimbursement plan”?

When you have a formal reimbursement plan, your business has official plan documents outlining how the reimbursement plan works. A formal reimbursement plan is a type of group health plan. In many cases, reimbursements are tax-deductible to the business and received tax-free by employees. Common types of formal reimbursement plans include:

• Section 105 Healthcare Reimbursement Plans (HRPs)
• Health Reimbursement Arrangements (HRAs)
• Employer Payment Plans

Q2. Does the plan comply with the new ACA Market Reforms?

As of January 1, 2014, the ACA introduced new Market Reforms that impact all group health plans, including reimbursement plans. To comply with the Market Reforms (PHS Act 2711 and PHS Act 2713), reimbursement plans must: 1) Not place an annual or lifetime limit on Essential Health Benefits, and 2) Cover basic preventive care 100%.

Types of reimbursement plans that generally comply include:

• Section 105 Healthcare Reimbursement Plans (HRPs)
• Stand-alone Health Reimbursement Arrangements (HRAs), with only one participant

Types of reimbursement plans that generally do not comply include:

• Stand-alone Health Reimbursement Arrangements (HRAs), with two or more participants
• Employer Payment Plans

Q3. Are you reimbursing employees directly, or paying for their premiums directly?

If you are reimbursing employees directly or if you are paying for employees’ premiums directly to the insurance company, this is considered a type of “Employer Payment Plan.” Under the new Market Reforms, Employer Payment Plans are out of compliance.

Q4. What is the Deadline to Transition to a Compliant Arrangement?

To avoid penalties, the revised deadline to transition to a compliant reimbursement arrangement is June 30, 2015 (see IRS Notice 2015-17, or read this article for more information). To transition to a compliant reimbursement arrangement (ex: ZaneHealth), contact a Reimbursement Software Provider to help you set up the plan and onboard employees.