For American workers, health insurance is still a well-liked employee benefit. But because of their stringent participation criteria and expensive yearly rate increases, traditional group health plans force many business owners to explore for alternative solutions to cover the medical expenses of their staff.
At least 95% of full-time employees and their dependent must have access to affordable health insurance that meets minimal value under the terms of the Affordable Care Act (ACA) for applicable large enterprises (ALEs) with 50 or more full-time equivalent employees (FTEs). Although they are exempt from the ACA’s regulations, small businesses frequently provide health benefits to entice and keep top staff.
Rather than offering a group health plan, some businesses can want to pay for their employees’ individual health insurance policies directly or through reimbursement. At first glance, this arrangement—known as an employer payment plan, or EPP—may seem perfect. However, providing one at your company may result in expensive ACA fines. What additional choices are there then?
We’ll go over everything you need to know about EPPs in this post, along with how to legally reimburse your staff for medical expenses through a health reimbursement arrangement (HRA) or taxable stipend.
What is an Employer Payment Plan?
According to IRS Notice 2013-541, employer payment plans are arrangements where an employer reimburses an employee for all or a portion of their individual health insurance premium expenses. Another type of EPP involves an employer paying for an employee’s health insurance premiums directly on behalf of the employee.
In each situation, the employer pays toward each employee’s individual coverage, not employer-sponsored coverage, like in a traditional group plan program.
The IRS doesn’t consider the following three arrangements EPPs:
1. An employer can give their employees additional compensation (i.e., a taxable stipend, raise, bonus, etc.) to pay for medical insurance.
a. As outlined in IRS Notice 2015-172, this arrangement must come with no expectation that the employee must use the money to buy health insurance. An employer also can’t ask for proof of insurance.
2. An employer can send a portion of an employee’s post-tax wages directly to the issuer of their individual health insurance coverage for premium payments as part of the employer’s payroll process.
a.This arrangement is only allowed at the employee’s request. It must meet the regulations outlined by the Department of Labor in 29 C.F.R. §2510.3-13.
3. An employer can offer an employee the choice of cash or a post-tax amount of money to go toward a health insurance policy.
4. The federal government allows certain HRAs to integrate with individual insurance policies.
Do Employer Payment Plans Comply with the Affordable Care Act?
After the federal government implemented the ACA, IRS Notice 2015-17 clarified information about EPPs and compliance. According to the Notice, EPPs or any other arrangement where employers reimburse or pay employees for their medical care (including purchasing an individual health plan) were considered group health plans.
All group health plans are subject to the ACA market reforms4, specifically the provisions prohibiting annual dollar limits on essential health benefits and requiring preventive services without cost-sharing. While health plans on the individual market follow the ACA market reforms, the IRS says EPPs can’t integrate with individual market policies to satisfy the ACA.
Because they don’t meet the market reform requirements and can’t use their integration with ACA-compliant individual plans to meet the necessary provisions, EPPs don’t comply with the ACA. This is the case regardless of whether the employer makes payments or reimbursements to the employee on a pre- or post-tax basis.
What’s the Penalty for offering an Employer Payment Plan?
If you’re an employer offering an EPP or other group health plan that doesn’t comply with the ACA, you could face a penalty of $100 per day per affected employee (or $36,500 per year per employee)5.
This penalty also applies to all employers—including non-ALEs (those with fewer than 50 FTEs)—because the ACA considers an employer payment plan a group health plan subject to the ACA.
Until December 31, 2015, the IRS provided small employers (non-ALEs) offering EPPs, S-Corporation healthcare arrangements for 2% shareholders, and Medicare and TRICARE reimbursement arrangements with temporary relief from the excise tax penalty to transition to an ACA-compliant health policy2.
However, business owners currently offering EPPs are subject to the penalty with no option for transition relief.
What are ACA-Compliant Alternatives to Employer Payment Plans?
If you have an EPP and don’t think traditional group coverage is right for your organization, a few ACA-compliant alternative coverage options are available.
One of these options is an HRA. An HRA is an IRS-approved, employer-funded health benefit that allows employers to reimburse employees tax-free for health insurance premiums and other qualified medical expenses.
With an HRA, you choose a monthly allowance that works for your organization’s budget, and your eligible employees use that allowance to pay for the healthcare services and items they need. Once an employee incurs an eligible expense and you verify and approve the cost, you reimburse them up to their allowance amount.
On the other hand, health stipends provide a flexible way to supplement your employees’ pay with taxable amounts to pay for their monthly insurance premiums and additional medical costs. Even while health stipends aren’t ACA-compliant on their own, they’re a great way to add to current health benefits and give your staff even more coverage.
In general, HRA group health plans are taken into account by the IRS under the ACA. While some HRAs particularly interact with group health plan coverage (such as the group coverage HRA, or GCHRA), others integrate with individual health coverage.
To find out more about how HRAs and stipends might benefit your company, your staff, and the ACA, let’s take a closer look at them below.
Qualified Small Employer HRA (QSEHRA)
When Congress passed the 21st Century Cures Act in 2016, small employers could offer their employees a qualified small employer HRA (QSEHRA). QSEHRAs aren’t group health plans and don’t need to adhere to the ACA market reforms. They’re also only for employers with fewer than 50 FTEs—ALEs that must comply with the employer mandate cannot offer a QSEHRA.
With a QSEHRA, small employers can reimburse their employees for healthcare expenses outlined in IRS Publication 502, including individual health insurance premiums, on a tax-free basis. Like all HRAs, only employers can contribute funds and set the monthly allowance. However, the IRS sets annual maximum contribution limits for QSEHRAs.
Employers offering a QSEHRA must offer it on the same terms to each of their full-time W-2 employees. Seasonal or part-time employees are also eligible if the employer chooses. They must receive the same allowance amount as full-time employees.
Lastly, QSEHRA reimbursements are payroll tax-free for employers and employees. Employees don’t have to pay income taxes on employer reimbursements as long as their health insurance policy meets minimum essential coverage (MEC).
Individual Coverage HRA (ICHRA)
In 2019, following an executive order, the Department of the Treasury, Department of Labor, and Department of Health and Human Services created regulations6 allowing a new type of health benefit to integrate with individual health insurance coverage under certain conditions, like meeting specific affordability requirements. This benefit is called an individual coverage HRA (ICHRA).
The ICHRA works much like the QSEHRA but is available to organizations of any size. It has no minimum or maximum employer contribution limits, and employers can offer different allowance amounts based on 11 employee classes for greater customization.
Instead of meeting ACA group market reforms, the ICHRA meets ACA requirements by requiring employees and their dependents to enroll in a qualified individual health plan to receive tax-free reimbursements. Additionally, employees must regularly attest to having individual coverage to continue receiving ICHRA benefits.
If you want to offer an ICHRA and a traditional group plan, you can do so. However, you can’t give the same employee class a choice between participating in the ICHRA or the group plan. Instead, you must offer one class an ICHRA and another a group plan.
Lastly, ICHRAs are an excellent solution for ALEs wanting an affordable and flexible alternative to traditional group health insurance. An ICHRA can satisfy the employer mandate as long as the ICHRA allowance is affordable. Based on affordability calculations, employees can opt in or out of the benefit.
With HRA administration software like PeopleKeep, you can easily design your ICHRA benefit to ensure it complies with the employer mandate.
Taxable Health Stipends
The last way you can support your employees’ healthcare needs is with a taxable health stipend. A health stipend isn’t a formal health benefit, so it doesn’t satisfy the employer mandate for ALEs. But you can compliantly offer them alongside a group health plan or an HRA to give your employees more comprehensive medical coverage.
With a health stipend, employers offer their employees a fixed amount of money that they can use to pay for individual policies and other medical expenses. Unlike EPPs, employers usually add stipend money to their employees’ paychecks as extra wages. There’s no limit to how much money you can offer with a stipend.
The IRS considers stipend money taxable income for the employee, and employers are subject to payroll taxes. But even so, stipends have many benefits. They’re customizable, can cover a wide range of expenses, work for all employee types, and are easier to administer because they have fewer compliance regulations than other health benefits.
You can also choose how you want to offer your stipend—whether on a one-time basis, regularly, or with the reimbursement method. However, you can’t legally require your employees to purchase a health policy with their stipend or ask for proof that they did. So, your employees can use their stipend on whatever they want—even if it’s not healthcare-related.
EPPs were a well-liked method before the ACA for businesses to cover their workers’ medical expenses. Giving your employees an HRA or stipend is a great method to legally repay them for their health insurance plans and other out-of-pocket medical expenses, even while you are no longer able to pay for their personal health insurance and medical bills directly.
The ACA’s regulations could initially seem complicated. But if you’re an ALE, you must make sure you abide by all applicable healthcare laws in order to stay in compliance and avoid paying heavy tax fines.