“The IRS and other agencies have issued three different sets of guidance making it clear that employers cannot give actively employed workers pre-tax dollars through a Health Reimbursement Arrangement (HRA) ,or any other type of arrangement, to purchase individual coverage on their own. Employers using this model will be subject to fines of up to $100 per employee per day.
However, the guidance does not apply to employers that use an after-tax funding arrangement, but there is another issue to overcome if using this model. Employers will want to ensure that their arrangement does not become subject to ERISA, a law that applies to group health plans. There is an ERISA safe harbor exemption (meaning ERISA does not apply) if the following guidelines have been satisfied:
- No employer contribution;
- No employer endorsement;
- No consideration/commission paid to the employer; and
- Enrollment in coverage is voluntary
As a result, employers will generally want to give employees the ability to use the after-tax funds at their own discretion (for insurance coverage or for other reasons) so the individual health plans don’t become subject to ERISA. By restricting the use of funds to individual insurance premiums, the arrangement would more than likely be subject to ERISA, and individual health plans cannot satisfy all of the ERISA requirements (e.g. COBRA). Penalties could apply for non-compliance.