Can My Employer Reimburse My Individual Health Insurance Premiums?

Yes, If You Work for a Small Employer; Maybe in the Future Otherwise

Patient giving nurse medical identification card in clinic
Individual Health Insurance Premiums. Hero Images / Getty Images

The Affordable Care Act only requires employers to offer health insurance benefits—to employees who work at least 30 hours per week—if they have 50 or more employees. But 96 percent of employers in the US have fewer than 50 employees, and are thus not required to offer health benefits to their workers.

Many of them do, of course. According to a survey conducted by the Transamerica Center for Health Studies in August 2015, health insurance benefits are offered by 61 percent of businesses with fewer than 50 employees (although that might be a high estimate; a National Federation of Independent Business analysis indicated that only 29 percent of businesses with fewer than 50 employees were offering coverage in 2015).

 Small group health insurance plans are available in every state, and employers with fewer than 25 employees can be eligible for a small business health care tax credit, depending on their employees' average income and how much of the premiums are paid by the employer. 

But what about the people who work for all of the small businesses that don't offer health insurance benefits? They have to use the individual health insurance market, where they can purchase coverage through the health insurance exchange, or outside the exchange (subsidies are not available outside the exchange).

Employer Reimbursement Allowed as of 2017

For plans purchased in the individual market (on or off-exchange), the enrollee—as opposed to an employer—is responsible for paying the premiums, although subsidies (which are actually tax credits) are available in the exchange for people who qualify based on their income.

But early ACA implementation regulations prohibited employers from reimbursing employees for individual market health insurance.

This changed as of 2017, under the 21st Century Cures Act (more details below), but let's take a look at how the rules were interpreted prior to 2017:

The ACA itself left this issue somewhat open to interpretation, but the IRS subsequently addressed the issue directly, and the penalty for non-compliance was steep: an excise tax of $100 per day, per applicable employee.

That can be as high as $36,500 per year in fines for each employee for whom the employer reimburses individual health insurance premiums. The regulations were scheduled to take effect in January 2014, but a transitional relief program was put in place that delayed the penalty until July 2015.

Essentially, the way the IRS interpreted ACA statute, reimbursing employees for individual market premiums was considered an "employer payment plan." Such plans are subject to group health insurance market reforms, including the ban on lifetime and annual benefit limits, and the requirement that certain preventive care be covered at no cost to the enrollee

And, the IRS specifically clarified that employer payment plans cannot be combined with individual market health insurance plans in order to fulfill the market reform requirements. This was true regardless of the fact that the ACA's market reforms do apply to individual market plans, and all new individual market plans are sold without lifetime or annual benefit limits, and with the same preventive care benefits as small group health plans.

There was nothing preventing employers from giving their employees a raise or taxable bonus in lieu of providing health insurance benefits.

But the tax-advantaged benefits of group health insurance premiums and health reimbursement arrangements were not available to be used in order to reimburse employees for individual health insurance premiums.

First Attempt to Allow Reimbursement Didn't Pass: H.R. 5447, the Small Business Health Care Relief Act

H.R. 5447, bipartisan legislation known as the Small Business Health Care Relief Act of 2016, would have make it legal for employers to reimburse up to $5,130 annually in individual market health insurance premiums for an employee, and up to $10,260 if the policy covers the employee's family (these amounts would be indexed for inflation).

H.R. 5447 passed the House of Representatives in June 2016, and had the support of the U.S. Chamber of Commerce and numerous small business advocacy organizations. But it stalled in the Senate.

The Congressional Budget Office determined that HR 5447 would have "no effect on federal budget deficits over the 2016-2026 period." Money reimbursed to employees for health insurance premiums would be pre-tax, resulting in lower federal income tax revenues. But the federal government would not have to provide premium subsidies to exchange enrollees whose employers opted to reimburse their premiums.

21st Century Cures Act Passes in 2016, Allows Reimbursement Starting in 2017

In December 2016, H.R.34, the 21st Century Cures Act, was signed into law by President Obama. The legislation is far-reaching, but one of the changes it made was to allow businesses with fewer than 50 employees to establish Qualified Small Employer Health Reimbursement Arrangements (QSEHRA).

If a small business doesn’t offer a group health insurance plan, a QSEHRA will let the business reimburse employees, tax-free, for some or all of the cost of purchasing individual market health insurance, on or off-exchange (if the plan is purchased on-exchange, the employee could still be eligible for a premium subsidy in the exchange, but the value of the QSEHRA is considered when determining affordability of the coverage, and the amount of the ACA subsidy is reduced by the amount that the employee receives from the employer through the QSEHRA).

Using a QSEHRA, the maximum amount that an employer can reimburse is $4,950 for a single employee’s coverage, and $10,000 for family coverage (that's for 2017; the value is indexed in future years). The maximum reimbursement is also prorated by month, so an employee hired in the middle of the year would only be eligible for a prorated amount of the maximum annual reimbursement.

Who Is Helped by the New Reimbursement Rules?

For employees who work for small businesses that don't offer health insurance, the availability of premium subsidies in the exchanges depends on income, along with family size and the cost of coverage in the applicant's area. In general, subsidies are available in most cases if the applicant's household income doesn't exceed 400 percent of the poverty level.

If you're currently receiving a premium subsidy (premium tax credit) in the exchange and your employer begins reimbursing premiums under a QSEHRA, the exchange subsidy would be reduced by the amount of the employer reimbursement. 

But if you're not eligible for a premium subsidy in the exchange (or if you are, but have opted to buy your coverage outside the exchange, where subsidies aren't available), a QSEHRA could directly benefit you if your employer decides to take advantage of that option.

Small employers are not required to reimburse premiums, just as they are not required to offer group health insurance under the ACA. But a QSEHRA allows allow them the flexibility to reimburse employees for health insurance premiums as part of their employee benefits package. 

The premiums being reimbursed are in the individual market, which has had much more volatile premiums than the small group market over the last few years. Some proponents of QSEHRAs note that they may encourage more people to enroll in individual/family coverage, bringing added stability to the individual market.

Can Large Employers Reimburse Individual Market Premiums?

Current regulations do not allow large employers to reimburse employees' individual market premiums. Employers with 50 or more full-time employees are required to offer group health insurance (purchased from an insurance company or self-insured) in order to avoid the ACA's employer mandate penalty, and they face even steeper penalties, as described above, if they reimburse employees for individual market premiums.

But in October 2017, President Trump signed an executive order that may eventually result in relaxed rules on this issue. The executive order doesn't change any rules on its own, as it simply directs various federal agencies to "consider proposing regulations" that would accomplish various goals. 

One of those goals is to expand the use of health reimbursement arrangements (HRAs) and provide more flexibility in their use, including "allow[ing] HRAs to be used in conjunction with nongroup coverage." 

So the Departments of Labor, Treasury, and Health & Human Services could draft new regulations to allow the use of HRAs by larger employers (possibly all employers, or possibly up to a specific number of employees). The proposed regulations would have to go through the normal rule-making process that includes a public notice and comment period. But if finalized, they would change the rules regarding the use of HRAs to reimburse individual market premiums.

All of this is still up in the air, as we don't yet know what will be in the regulations that will presumably be proposed. Of significant importance is the question of whether employers would fulfill the employer mandate requirement by reimbursing all or a portion of an employee's individual market premium, and also whether the reimbursed coverage would have to meet minimum requirements in terms of the level of benefits it provides.

But while the details are still unclear, it does appear that the rules regarding employers reimbursing individual market health insurance premiums are likely to be relaxed under the Trump Administration.

Sources:

Congress.gov, H.R.34 - 21st Century Cures Act. Enacted 12/13/2016

Congressional Budget Office, H.R.5447 Small Business Health Care Relief Act of 2016

Internal Revenue Service, Employer Health Care Arrangements.

Internal Revenue Service, Small Business Health Care Tax Credit and the SHOP Marketplace.

Transamerica Center for Health Studies, Survey: Companies Navigate the Health Coverage Mandate, December 2015.

White House, Office of the Press Secretary. Presidential Executive Order Promoting Health Care Choice and Competition Across the United States. October 12, 2017.

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