Group Sponsored vs Individual Plans
Can an employer pay for individual health insurance policies? Since the affordable care act was passed, a lot of the distinctions in policies have changed. Both individual and small-group health insurance is now issued on a “guaranteed issue” basis. Insurance companies cannot decline to issue a policy based on past or current health status, nor can they increase the premium amount for those reasons. All individual and small-employer plans will treat any condition regardless of whether it is pre-existing, and unless a plan is “grandmothered.” I.e., it has been in place since before the ACA became effective, maternity is fully covered on both individual and small-employer coverage.
With so many of the former distinctions blending together, is it really important whether the coverage an employer pays for is a group benefit or is individually issued? Can’t an employer simply pay the premiums for an employee’s individual health plan?
To the first questions, YES. To the second question, NO.
An employer which sponsors any health benefit plan for its employees is subject to laws and regulations regarding uniform treatment of employees (in terms of employer contribution, eligibility waiting periods, etc.) and availability of continuation coverage to terminated or no-longer-eligible employees. An employer which directly pays its employees’ individual insurance premiums would be, in the eyes of the law, sponsoring a de facto group benefits plan while circumventing the legal safeguards which insurance companies build into their group benefit pan designs.
The IRS has been very clear and forceful in a number of notices clarifying the requirements stemming from the ACA, including Notice 2015-17. In plain language, an employer is prohibited from either directly paying premiums for individual policies or reimbursing employees for individual premiums, in any manner. Fines in the amount of $100 per employees per day could be assessed against employers engaging in this kind of direct payment or reimbursement.
Of course, there is no law dictating how much an employer must pay any employee in wages, and nothing prevents a small employer without a benefits plan from increasing an employee’s wages to help compensate for the absence of a group benefits plan (although both the employer and the employee would miss out on the tax advantages available through a group benefits plan). However, an employer CANNOT obligate an employee to use any portion of paid wages for individual insurance coverage, nor can the employer make any portion of wage compensation contingent on individual coverage being in place; as far as the IRS is concerned, that would constitute the kind of direct reimbursement prohibited above.
If you are an employer, Encore Benefits would be happy to discuss with you the costs, benefits, and liabilities of any compensation and benefit arrangement you may have or are considering.
Nothing in this document should be construed as legal or financial advice.