12/02/13 UPDATE: A colleague forwarded us the best summary we have seen addressing the various types of tax-advantaged plans that employers have used in the past to help employees pay for the cost of medical coverage. The link is a .pdf download from the American Benefits Council, prepared by Morey Crowell.
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The use of Health Reimbursement Arrangements (HRA’s) to provide employees with a defined employer contribution for the purchase of individual health insurance has always been a grey area, but the Department of Labor has now made it black and white. In response to FAQ’s on the implementation of the Affordable Care Act, the DOL, HHS and IRS have stated that this will not be allowed.
This practice, while extremely tax efficient for both the employer and employees, already created some legal compliance questions with respect to ERISA and HIPAA rules. This new guidance from the Departments indicates that employers will no longer have the option to use this type of defined contribution for employees to purchase individual health coverage.
An excellent white paper from the State Health Access data Assistance Center addresses a closely related issue – whether the use of Section 125 cafeteria plans are allowable to help employees purchase individual plans on a pre-tax basis. Short answer: before PPACA, sometimes. After PPACA, almost never.
