IF IT SOUNDS TOO GOOD TO BE TRUE
With the runaway increase in the cost of benefits, many employers are looking for ways to reduce their spending, while being able to hire and retain high quality employees. However, some of the newest benefit arrangements being created and sold to employers (especially smaller employers that cannot self-fund their benefits) may put the employer, and their employees, in an adverse situation. Many of these programs promise to drastically lower costs, however, great caution must be taken as many of these arrangements can put an employer at risk for audits and costly fines. Additionally, an employee can be placed in adverse tax situations due to decisions made by their employer of which they had no knowledge.
This is a complicated issue because there are multiple federal laws and state laws involved where the rules and regulations may be unclear, difficult to understand, or oppose each other in certain areas. Some of these programs are playing fast and loose with regulation, or to put it bluntly, being ‘cute’ with the letter of the law.
It is vitally important for an employer looking to offer an unconventional or untraditional benefit option to speak with an independent health plan attorney and/or accountant regarding their potential liability and compliance with the various federal and state laws regarding employer sponsored health plans.
PARTICIPATING IN AN HSA WITHOUT A QUALIFIED HIGH DEDUCTIBLE HEALTH PLAN
Many in our free market space promote the use of Qualified High Deductible Health Plan (HDHP) and Health Savings Accounts (HSAs), however, we are frequently seeing employers and individuals who are offering or utilizing HSAs without utilizing a qualified High Deductible Health Plan (HDHP).
An HDHP is a highly regulated plan design with specific mandatory benefits that a patient/participant MUST be enrolled in to be able to contribute to a tax advantaged HSA. HSAs are a tax-advantaged option that may be used to save for health care expenses on a pre-tax basis.* (Note: HSAs and Health Reimbursement Accounts are different vehicles and have different requirements).
The most important thing to remember is that the only health plan design that is authorized by HHS and the IRS for use with a Health Savings Account is a Qualified High Deductible Health Plan as defined by the IRS. This plan must conform to established federal guidelines.
To be an eligible individual and qualify for an HSA, you must meet the following requirements. You are covered under a high deductible health plan (HDHP)…on the first day of the month. You have no other health coverage except what is permitted under other health coverage. You aren’t enrolled in Medicare. You can’t be claimed as a dependent on someone else’s tax return.
HDHPs have mandated limitations on deductibles and require that the participant must meet their deductible prior to any benefits for services being paid by the Plan (except for ACA mandated Preventive benefits).
If a participant is found by the IRS to have an active HSA account without the required participation in a Qualified High Deductible Health Plan, they could be placed in an adverse tax situation. The employee can be placed in this situation due to decisions made by their employer, of which they had no knowledge or control. It does not matter whether the employer or the employee is contributing to the HSA for this to be the case.
OFFERING DPC TO PARTICIPANTS WHO ARE ENROLLED IN AN HDHP WITHOUT HSA
Anyone familiar with the commonly promoted premise that HDHPs and HSAs are free-market-friendly and encourage good consumer behavior would assume that having a Direct Primary Care membership would be a perfect fit. However, the IRS takes a different view entirely.
A letter from IRS Commissioner Patty Murry on June 30, 2014 (copy available on fmma.org), states clearly:
“For an individual to be eligible to make tax-deductible contributions to an HSA, however, the individual must be covered by an HDHP and no other plan that is not an HDHP, unless the other plan is disregarded coverage under section 223(c)(1)(B) or preventive care. A DPC medical home plan appears not to be one of the listed disregarded coverage plans in section 223(c)(1)(B). When that is the case, an individual would not be eligible to make tax-deductible contributions to an HSA while covered by both an HDHP and a DPC medical home plan, unless the DPC medical home plan provided only preventive care.”
Current proposed legislation may change these rules, but as of today, employers, and those marketing this combination, should also be very careful. You may be putting the patient or employee in an adverse tax liability situation.
Many states have passed legislation stating that DPC is not a health plan. However, these state rules are for purposes of State Insurance Department regulation and have no impact on Federal IRS rules.
OFFERING DPC AS A BENEFIT OUTSIDE OF AN HDHP
There are additional considerations for an employer who wants to pay for DPC membership for their employees who do not have a High Deductible Health Plan (or for those who offer no health benefits at all). The employer must be careful not to violate the regulations under IRC s104, IRC s105, and s213 regarding offering benefits pre-tax and what are considered ‘deductible medical expenses’ by the employer. Currently, Direct Primary Care is not considered a qualified medical expense, and employers who pay these fees directly run the risk of it being considered a health plan that is non-compliant with the ACA. Employers can still offer DPC by utilizing an integrated Health Reimbursement Account (HRA) or by paying the membership as a taxable benefit.
EMPLOYERS AND HEALTHSHARE MINISTRIES
Healthshare ministries are an amazing option for individuals who need coverage but want an alternative option to the policies being sold in the marketplace. A standard healthshare ministry is an organization that facilitates the sharing of health claims costs by its membership who have common religious beliefs (there are a few who do not have this requirement). Members are generally required to sign statements of faith and/or behavior.
These organizations are not insurance; they do not perform underwriting, accept risk, or make guarantees of payment of claims. Some states have regulations blocking healthshare ministries as selling unauthorized or unregulated insurance. Conversely, many states have laws protecting healthcare ministries.
Due to the individual mandate provision in the Patient Protection and Affordable Care Act (ACA) (which has been repealed, but is still in effect until 2019), healthshare ministries are a great way for individual consumers to purchase a level of protection that was more affordable that typical insurance.
There are a few issues regarding employers offering a healthshare ministry as their benefit plan.
The IRS rules do not allow for an employer to contribute to a healthshare ministry for their employees on a pre-tax basis as healthshare ministry expenses are not tax deductible for the individual member. *
In correspondence dated June of 2016, the IRS stated, “the law does not exclude employer payment for the cost of employee participation from the employee’s gross income. Instead, the law considers it as taxable income and wages to the employee.” Healthshare ministry costs, premiums, or contributions are not a tax-deductible expense. If the employer reimburses any portion, the employee must pay Federal, State, Local and Social Security taxes.
Healthshare ministry plans do not make an employer compliant with the ACA Employer Shared Responsibility Provisions (Play or Pay provisions).
For an employer, healthshare ministries plans are not considered Minimum Essential Coverage, nor are they a Qualified Health Plan with Essential Health Benefits.
- Discrimination. There is potential for the employer to be considered discriminatory due to the requirement of a “statement of faith” by the healthshare ministries organizations. An employee who is not of the same faith or does not share the values of the healthshare could sue their employer for offering benefits that they cannot utilize due to their religious beliefs.
- Taxes. The employer shared responsibility provisions under section 4980H of the Internal Revenue Code require that employers of a certain size must offer coverage to their employees with Minimum Essential Coverage, that includes Essential Health Benefits, and that is “affordable” (these rules can be found on the IRS website).
- These two sets of standards, often called Pay or Play, are distinct from each other. More details on these regulations can be provided upon request.
- Compliance. Employers below the employee threshold are not required to offer coverage, BUT if they decide to do so, it must be a Qualified Health Plans or they will face hefty fines.
- All non-grandfathered plans sold to individuals or small employers must be Qualified Health Plans (QHPs), whether sold in the state or federal Marketplace or sold outside the Marketplace.
COMBINING THESE APPROACHES
Even more importantly, some brokers, agents, and organizations are offering options that include combinations of the options listed. Plans that have annual or lifetime limits, limits on essential health benefits, pre-existing condition limitations, etc. do not meet the standard. If an employer chooses to offer any benefits in addition to Minimum Essential Coverage, they must be structured correctly, or the employer may face costly penalties. Please consult your legal counsel before adopting one of these programs or options to ensure compliance.
We can all agree that solutions must be found to encourage value-based healthcare decisions, lower the cost of care, and maintain and improve quality; however, it is important for employers to be fully aware of what the regulations may impact them to safeguard against inadvertently putting themselves, or their employees, in an untenable situation.
It is important for an employer looking to offer an unconventional or untraditional benefit package to speak with an independent health plan attorney or CPA (not employed by the agency selling the program) regarding potential liability and compliance with federal and state laws regarding employer sponsored health plans.
Can your employee afford to reimburse the IRS for taxes not collected on an inappropriately structured HSA? Can your business afford a fine of $100 per day per employee for every day that the unqualified arrangement was offered? These are just some of the potential liabilities.
The rules and regulations are complicated, and the fines can bankrupt a business. The importance of seeking specific, independent, and expert legal advice on benefits cannot be overstated, it could save your business.
*Please review IRC s104, IRC s105, and s213 for regulations regarding pre-tax benefits.
This information is not intended to be legal advice and is of an informational nature only. Citations are not provided; however, all rules, regulations, and correspondence mentioned herein are available via the U.S. Internal Revenue Service and Department of Health and Human Services websites. New legislation or regulations implemented after the date of publication may impact the details outlined herein.