Can employers reimburse employees for the cost of personal policy premiums?

Employers are allowed to use HRAs to reimburse employees tax free for personal health insurance premiums, similar to the way employers contribute on a tax free basis to group premiums. This has been clarified with the release of numerous U.S. Treasury and State publications spelling out how employers can use HRAs for tax-free reimbursement of the premiums paid for personal health insurance policies. See "Insurance Premiums" in IRS Publication 502.  Also see IRS Publication 969.

There are specific HIPAA and ERISA regulations governing the distribution of personal health insurance policies at the workplace--basically restricting employer involvement with the sale or administration of employee Personal health policies. ZaneHRA (patented) is the only employer health benefits administration platform that automatically ensures employer, agent, and insurance carrier compliance with these regulations (See Legal 2 of 2 on ZaneHRA Sign-up demo).

Private Insurance Carriers

Notwithstanding new federal and state regulations encouraging employers to pay for personal policy premiums, some insurance carriers wish to limit the sale of their less expensive personal policies to people who otherwise might participate in their (much more expensive) small group plans, or are concerned about outdated state regulations (see below). Such carriers typically ask applicants for personal policies to certify that do not intend to obtain reimbursement or payment for their premium through an HRA or a reduction of pre-tax salary.

In such cases there are two solutions for the employee using ZaneHRA who has a personal health policy from one of these carriers:

1. Switch to a different insurance carrier that does not restrict payment or reimbursement of personal policy premiums by employers; or

2. Choose a higher-deductible personal policy and use HRA funds to pay for under-deductible and supplemental (e.g. dental, vision, copays) expenses vs the premium on the personal policy.

Outdated, Unenforced State Insurance Regulations

HRA tax-free reimbursement by employers to employees for the cost of personal policy premiums is absolutely allowed in all U.S. States. Period.

In a minority of states, there are outdated, conflicting, unenforced insurance regulations stating or implying that the payment by an employer of a personal policy premium, by a small employer only, could result in the insurance carrier (not the employer) having created a "group plan"--and thus the carrier could have to issue a similar policy to other employees regardless of health status or age. While such specious regulations have never been tried in the courts, if they were tried and proven valid, such validity could only benefit both employers and employees. Most insurance carriers ignore these regulations entirely or take a "don't ask don't tell" policy with respect to their policyholders. ZaneHRA recommends that appointed insurance agents follow the rules of their insurance carriers.

Separate from the desire of private insurance carriers to keep healthy people from leaving their group policies, a few states still have outdated, unenforced regulations governing insurance carriers (not employers) in contradiction to new federal regulations and their own, more recent, state laws.  Some of these states also have similar unenforced laws restricting interracial marriage in contradiction with federal law. Such insurance regulations typically say or imply that employer payment or reimbursement of a personal health policy by a small employer constitutes a “group plan”—thus requiring a personal policy insurance carrier to offer the same personal policy to all employees of the "small employer" regardless of health status.

Note that these outdated regulations specifically state that they apply only to insurance carriers selling personal policies to employees of small employers (less than 18-50 employees).  This is because the regulations were written decades ago to price-protect insurance carriers offering small group plans from having healthy employees opt-out of the small group plans for less expensive personal policies.

These outdated, unenforced regulations are sometimes referred to by group health insurance brokers attempting to scare employers from switching to permanent, portable, and much less expensive personal policies.  Today, less than 50% of small employers offer any employee health benefits, and every year 2 million fewer employees receive group coverage due to rising cost.  In cases where employers do not offer either a group plan or tax-free HRA reimbursement for personal policies, employees simply pay effectively twice as much for their personal polices on an after-tax basis.

At least five states have ridiculous regulations stating that if two employees working in the same company each purchase the same personal policy, even without employer premium reimbursement, it constitutes a “group plan” for the carrier-- even if the carrier has no knowledge that its two separate policyholders work for the same company.

Note that these regulations do not apply to employers, since state insurance departments regulate insurance carriers (versus employers). These insurance department regulations are practically unenforceable since: (1) When reimbursing an employee’s HRA claim through a HIPAA- and ERISA-compliant platform such as ZaneHRA, employers are unaware whether the HRA reimbursement is for a doctor visit or a health insurance premium; and (2) Insurance carriers are unaware if, after a policyholder pays a monthly premium, the policyholder later receives reimbursement from their employer for the premium.

As a further complication, several states such as Massachusetts and Missouri (See HB 818) recently began requiring small employers to offer either Section 125 (Cafeteria Plan) or Section 105 (HRA) tax-free reimbursement for payment of personal health policy premiums in contradiction with their own unrepealed, pre-HRA insurance department regulations.

To summarize:

1. The overwhelming majority of employers and insurance carriers today ignore the outdated state insurance department regulations restricting reimbursement of personal health policy premiums by employers. If insurance carriers in these few states were concerned, they would ask personal policyholders to certify, with each month's payment, that the policyholder was not accepting tax-free reimbursement for their premium from an employer.
2. None of these outdated state insurance department regulations say in any manner that employers are not allowed to reimburse or pay for personal policy premiums. The regulations effectively say that if an employee obtains payment for their personal policy from an employer, the insurance carrier (not the employer) must offer a similar personal policy at the same price to other employees of the same company regardless of health status.
3. While there is not one known instance of an insurance department in any state ever requiring an insurance carrier to offer a similar policy to a less healthy employee, if such a regulation were ever enforced, it could only help the employer and their employees since an employee with a preexisting condition would be entitled to receive a lower-cost personal health policy from the insurance carrier.