The DOL Identifies Impermissible Cash Payments for Individual Medical Insurance

The initial effective date of the employer shared responsibility provisions of the Patient Protection and Affordable Care Act (PPACA) is January 1, 2015. These provisions are often collectively called the “employer mandate.” As the effective date approaches and it becomes less likely that Congress will provide an additional last-minute extension, some employers are considering alternate ideas to strike the right balance among the competing concerns of cost savings, legal compliance, and meeting employee needs when providing employee medical insurance. One commonly proposed solution is to provide employees with cash to help them purchase an individual medical policy on the public exchange. The Department of Labor (DOL) clarified in a FAQ document published on its website on November 6, 2014 that this is not appropriate in a number of situations.

The first situation cited by the DOL is where an employer offers employees cash to reimburse the purchase of an individual policy. This arrangement does not comply with PPACA because it meets the definition of group health plan coverage and is thus subject to applicable market reform provisions (the rules governing what types of plans must be offered). Because there is no way to guarantee that the individual policies purchased by employees would meet market reform requirements, a cash reimbursement arrangement is not permitted.

In addition, the DOL addressed employers’ possible treatment of employees with an underlying health factor that creates the risk of high claims. The FAQ clarifies that employers may not target these employees for a choice of cash or coverage under the employer’s group health plan because such a choice amounts to impermissible discrimination on the basis of a health factor.

Finally, the DOL addressed an option that a number of vendors are marketing to employers. The DOL stated that a reimbursement arrangement set up in accordance with the rules of Code Section 105 is a group health plan that must comply with the applicable market reform provisions. Without a compliant underlying health plan, this type of arrangement is not permitted.

With these guidelines, it appears clear that the safest way for employers to give cash to employees to help with their medical expenses outside of sponsoring a group health plan is to increase their compensation through either base wages or bonuses.