With the high cost of health insurance many companies are considering alternative financing arrangements to group health plans.   The Affordable Care Act (i.e., ACA, Obama Care, Health Care Reform) created exchanges to help individuals purchase their own coverage.  Also, the ACA forbids insurance companies from asking questions about preexisting medical conditions; so, an insurance company can’t decline coverage when someone applies during the open enrollment period.  Further, the ACA offers low wage workers government subsidies to reduce the cost of individual health insurance.  These factors have led employers to wonder whether employees should purchase an individual medical insurance policy and then the company could reimburse the employees for that coverage.   This article describes issues related this arrangement.  Another article discusses a slightly different but related arrangement where an employer gives employees a salary bonus or taxable stipend which employees can use to purchase their own health insurance plan.

Government restrictions: The IRS and the US Department of Labor have come out with very convincing rulings that say that an employer can NOT reimburse INDIVIDUAL health insurance premiums for employees. This is an interesting summary of the individual vs. group health insurance ruling.  Here is the recent guidance from the IRS on the consequences to the employer for reimbursing employees for “individual” health insurance .  These restrictions especially apply to individual plans purchased through an exchange, like Covered California, and they apply to “off-exchange” individual plans.

Accordingly, we strongly recommend that companies NOT reimburse employees for individual health insurance plans.

Proponents of Individual plans for Employers: An article in the New York Times describes the actions of some third party administrators (TPA’s) who are aggressively marketing an arrangement where employee’s (EE) submit receipts for their individual coverage to the TPA and then the TPA reimburses employees for the premium from money the employer has set aside.

Big Financial Penalties: There are many, many problems with this approach – the biggest being that most people feel that it is illegal and it exposes employers to huge penalties ($100/day/EE, or $36,500/year/EE penalty.) (See the above referenced IRS guidance.)  Also, the TPA’s charge high fees for their services; and, newly hired employees with no prior coverage, or a qualifying “special enrollment” event, are ineligible to enroll in individual health insurance plans outside of the “open enrollment period.”  This means that a new hire won’t be able to buy health insurance, even if he/she wants it.  (Imagine explaining that to your newly hired key executive – “sorry, you can’t get health insurance until the beginning of next year.”)

If a company wants to help employees purchase health insurance, the  most cost and tax-efficient way is to set up a GROUP medical insurance plan. Click here to learn more about employer-sponsored medical insurance coverageClick here to get a quote for group health insurance.

Salary Bonus: Other than setting up a GROUP health plan; the ONLY way an employer (ER) can help employees (EEs) buy INDIVIDUAL coverage and not be subject to the huge IRS penalty is by increasing salary.  The problem with this approach is that an ER must pay an additional 7.65% in FICA payroll taxes (for Medicare and Social Security) plus worker’s comp insurance is calculated based on salary so that a salary bonus for health insurance increases worker’s comp insurance for the company (usually 3-5%).  PLUS, the EE must pay 7.65% FICA taxes PLUS pay California State income tax and Federal income taxes (20-30% depending on the wage).  So, if an employer bonuses $100, it must pay about $110 to account for FICA and worker’s comp.  The EE must pay FICA and income taxes so he/she receives about $70.  The ER pays $110 and the EE nets $70 to pay for health insurance.  It is very inefficient tax-wise.  That is why companies offer group health insurance.  See this article on the tax benefits of group health insurance.

Individual vs. Group Plan BENEFITS and NETWORKS of doctors and hospitals:  Remember that ALL INDIVIDUAL health insurance plans in California (except Kaiser) have significantly smaller provider networks than group plans.  Fewer doctors and hospitals accept individual health insurance plans. That is the reason that some people mistakenly believe that individual plans are less expensive than group plans. If you compare a narrow network individual plan with a narrow network group plan with comparable benefits, they are very similar in price. Individual plans offer no price savings.

This is a result of the Affordable Care Act (ACA or Obama Care). Before the ACA, insurance companies asked medical questions and declined coverage to individuals with pre-existing conditions. As a result, insurance companies could offer the healthier people, whom they approved, lower priced plans. Now, the ACA forbids insurance companies from asking questions about a person’s medical history.   Insurance companies can’t separate the healthy from the unhealthy and they must charge everyone the exact same rate based on age and geographic location. Consequently, individual plans are comparably priced to group plans.

Individual plans offer only very narrow provider networks with VERY few doctors and hospitals.  This reduces the price of individual coverage but, like everything, you get what you pay for.

Group, employer-sponsored plans, however, offer the choice of:

  1. full, extensive provider networks;
  2. slightly narrow networks; or,
  3. very narrow networks.

Compare the price of the narrowest network group plan with individual plans with narrow networks and you will find that they are similarly priced.

So, to obtain the lowest cost health insurance plans with the best benefits; the most extensive provider networks of doctors and hospitals; and to use tax-advantaged dollars to purchase the plans; set up an employer-sponsored group medical insurance plan.  Stay away from individual plans for your employees.

August 15, 2014