Question: What are the main employer considerations when responding to employee requests to pay for or reimburse a medical expense outside of the health plan?

Short Answer: Employers should not pay for or reimburse a medical expense outside of a health plan because the payment creates a group health plan that must comply with ERISA, COBRA, HIPAA, the ACA, and the other laws governing employer-sponsored group health plans.

Note: This is the sixth in a ten-part series addressing employee health plan exception requests.

• Part I: Mid-Year Enrollment Requests Outside of Permitted Election Change Event

• Part II: Ineligible Part-Time Employee Enrollment Exception Requests

• Part III: New Hire Exception Requests to Enroll Prior to Satisfying the Plan’s Waiting Period

• Part IV: Independent Contractor Exception Requests to Enroll Non-Employees in the Health Plan

• Part V: Employee Exception Requests to Enroll an Ineligible Dependent

Specific Expense Payment Exceptions: Requests for Employer to Reimburse Outside the Plan

Although many employers expend a great deal of time, effort, and money to maintain group health plan offerings for employees, there will always be at least perceived gaps in coverage where employees believe the plan does not provide sufficient benefits. This will often create situations where an employee requests that the employer pay for or reimburse a specific medical expense that was not covered by the group health plan.

Common examples of situations where an employee will request reimbursement of a medical expense outside of the formal ERISA group health plan include:

• Services not sufficiently covered by the group health plan (e.g., infertility expenses, abortion travel expenses, gender dysphoria expenses, mental health expenses, autism-related expenses);

• Cost-sharing under the group health plan (i.e., deductibles, copays, coinsurance);

• Items and services not covered by the group health plan;

• Out-of-network provider costs under the group health plan;

• High-cost pharmaceuticals;

• Individual policy premium costs for part-time or out-of-state employees;

• Medical wellness expenses outside a wellness program integrated with the group health plan.

Reimbursement of the Medical Expenses Creates a Group Health Plan

Reimbursement of Internal Revenue Code §213(d) health expenses creates a group health plan, which would trigger the full array of group health plan laws (ERISA, COBRA, HIPAA, ACA, HSA eligibility, §105(h), etc.).  Therefore, employers should avoid providing reimbursement for any §213(d) medical expenses outside of the group health plan unless it is part a HRA or wellness program that is integrated with the health plan.

• IRS Publication 502 provides a useful summary of expenses that qualify as §213(d) medical expenses.

Problems with Inadvertent Creation of a Reimbursement-Based Group Health Plan

Employers that accommodate exception requests to reimburse medical expenses outside the traditional group health plan will (likely inadvertently) create another group health plan in the form of the reimbursement arrangement. Despite any sense that the payment is informal and limited to specific “one-offs,” this reimbursement-based group health plan would in effect be a de facto HRA that must comply with the full array of laws governing employer-sponsored group health plan.

This reimbursement-based group health plan would face several impractical compliance requirements, including:

ERISA: The reimbursement arrangement would need a plan document and SPD, the employer would have the ERISA fiduciary duties, ERISA’s claims and appeal procedures would apply, the Form 5500 filing requirements, etc.

• For full details, see our Newfront Office Hours Webinar: ERISA for Employers.

ACA: In general, the only way to structure a separate medical reimbursement program is to make it a health reimbursement arrangement (HRA). The ACA prohibits stand-alone HRAs. Therefore, the HRA would need to be integrated with the employer’s major medical plan. A non-integrated HRA could create penalty liability for the employer of $100/day/participant.

• For full details, see our Newfront Office Hours Webinar: Fringe Benefits for Employers.

COBRA: Employers must provide COBRA continuation coverage rights to employees who experience a qualifying event when covered by a group health plan. COBRA rights would apply to this de facto HRA.

• For full details, see: COBRA for Specialty HRAs.

HIPAA Privacy/Security: The employer would need to treat all individually identifiable health information related to the program as protected health information (PHI) subject to HIPAA’s strict restrictions on use and disclosure. It would also be subject to the policies and procedures, notice of privacy practices, and HIPAA training requirements.

• For full details, see our HIPAA Training for Employers Guide.

HSA Eligibility: An HRA that is not specifically designed as HSA-compatible is disqualifying coverage for any individual covered by the HRA because it provides medical coverage prior to satisfying the requisite minimum HDHP deductible. This reimbursement arrangement would therefore need to be structured as post-deductible for employees enrolled in the HDHP to preserve their HSA eligibility.

• For full details, see: Post-Deductible HRAs Preserve HSA Eligibility.

Individual Policy Reimbursement Prohibition: If the arrangement included reimbursement of an individual policy premium, the ACA prohibits such arrangements as an impermissible “employer payment plan.” Only HRAs that are specifically designed to meet the numerous requirements to qualify as an Individual Coverage HRA (ICHRA) could satisfy those ACA requirements and avoid potential penalties of $100/day/employee. ICHRAs impose many significant limitations, including a requirement that the employee not be eligible for both an ICHRA and the traditional employer-sponsored major medical group health plan.

• For full details, see our Newfront ICHRA for Employers Guide.

§105(h) Nondiscrimination: HRAs are self-insured group health plans subject to the §105(h) nondiscrimination rules. Therefore, the §105(h) eligibility test, benefits test, and operational discrimination test would apply if the reimbursement arrangement took the form of an HRA. If the employer were to make the reimbursement arrangement taxable, it would no longer technically be an HRA (although some refer to the approach as a “taxable HRA”). In that case, although all the other compliance issues addressed above would still apply, the §105(h) nondiscrimination rules would not apply.

• For full details, see: The Section 105(h) Nondiscrimination Rules for HRAs.

Solution #1: Establish an HRA

One strategy employers could use to address all of the compliance issues associated with an exception to reimburse an employee’s medical expense outside the group heath plan is to establish an HRA designed to cover the medical expenses at issue. The HRA would be the vehicle to comply with all applicable group heath plan laws that apply.

HRAs designed for the purpose of reimbursing expenses not sufficiently covered by the group health plan are typically referred to as a “specialty HRA” in reference to their focus on special types of medical expenses, as opposed to a more traditional cost-sharing HRA designed to address the umbrella deductible, co-insurance, and co-pay costs under the medical plan. Employers would need to work with a TPA to properly establish, maintain, and administer the specialty HRA.

For more details, see:

• Newfront Office Hours Webinar: Fringe Benefits for Employers

• Post-Deductible HRAs Preserve HSA Eligibility

• COBRA for Specialty HRAs

• Nondiscrimination Rules for Specialty HRAs

• Common Infertility HRA Expenses

• Setting Up a Specialty HRA

Solution #2: Avoid Creating a Group Health Plan

Employers may have a strong desire to preserve the informal “one-off” exception-based approach to a specific employee request to address a medical expense outside the group heath plan.

The employer can always provide additional taxable cash compensation to employees that is not conditioned in any way on the employee’s actual medical expenses incurred.  For example, the employer can provide an employee experiencing unexpected medical expenses with a standard raise/bonus/stipend that is taxable and subject to withholding and payroll taxes.

These payments cannot be a direct or indirect reimbursement of any medical expenses incurred (taxable or non-taxable).  In other words, the employer could not determine the amount of the payment based on the actual medical expenses incurred by the employee, nor could the employer condition the additional payment on the employee’s submission of medical receipts. Any such form of reimbursement would trigger a group health plan and the issues outlined above.

• Note: Employers often question why they cannot simply reimburse medical benefits on a taxable basis to avoid application of the group health plan legal restrictions. However, reimbursement of medical expenses on a taxable basis would still be a group health plan subject to all the group health plan laws described above (with the exception of the §105(h) nondiscrimination testing requirements), and therefore it is also not a viable solution. That taxable reimbursement approach would no longer be an HRA because it would not be designed as a tax-advantaged vehicle under IRC §105 and §106, although some refer to the approach as a “taxable HRA” because it would still be a (non-tax advantaged) defined contribution group health plan arrangement.

With respect to individual policy premiums, employers can provide additional taxable cash compensation (e.g., a raise or bonus) to assist employees in purchasing an individual policy. The ACA prohibition on reimbursement of individual policy coverage (outside of an ICHRA) requires there not be any conditions associated with those funds. To avoid creating a prohibited employer payment plan under the ACA, the employee must have an unrestricted right to receive the taxable funds as cash, cannot be required to use the additional compensation to purchase health coverage, and cannot be required to substantiate the purchase of individual market coverage.

Summary

For the reasons outlined above, employers should generally avoid accommodating employees’ requests to reimburse a medical expense outside of the group health plan. Reimbursement of the expense would create another group health plan in the form of the reimbursement arrangement, which would be subject to the full array of laws governing employer-sponsored group health plans. Such an arrangement would almost certainly not be designed to comply with ERISA, COBRA, HIPAA, the ACA, and other related laws.

As an alternative, employers can work with a TPA to establish an HRA designed to cover specific medical expenses. The HRA would be an approach designed to comply with all applicable group health plan laws.

Employers could also always provide additional taxable cash compensation to employees. However, in order to avoid such payment creating a group health plan, the employer would need to ensure the payment is in no way related to the medical expenses incurred by the employee. Even reimbursement on a taxable basis of the employee’s medical expenses would create a group health plan subject to all of the compliance requirements described above.

Relevant Cites:

ERISA §733(a):

(a) Group health plan.
For purposes of this part— 
(1) In general. The term “group health plan” means an employee welfare benefit plan to the extent that the plan provides medical care (as defined in paragraph (2) and including items and services paid for as medical care) to employees or their dependents (as defined under the terms of the plan) directly or through insurance, reimbursement, or otherwise. Such term shall not include any qualified small employer health reimbursement arrangement (as defined in section 9831(d)(2) of the Internal Revenue Code of 1986).
(2) Medical care. The term “medical care” means amounts paid for—
(A) the diagnosis, cure, mitigation, treatment, or prevention of disease, or amounts paid for the purpose of affecting any structure or function of the body,
(B) amounts paid for transportation primarily for and essential to medical care referred to in subparagraph (A), and
(C) amounts paid for insurance covering medical care referred to in subparagraphs (A) and (B) .

IRC §213(d)(1)(A):

The term “medical care” means amounts paid—

(A)  for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,

Treas. Reg. §1.213-1(e)(1)(ii):

(ii) Amounts paid for operations or treatments affecting any portion of the body, including obstetrical expenses and expenses of therapy or X-ray treatments, are deemed to be for the purpose of affecting any structure or function of the body and are therefore paid for medical care. Amounts expended for illegal operations or treatments are not deductible. Deductions for expenditures for medical care allowable under section 213 will be confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness. Thus, payments for the following are payments for medical care: hospital services, nursing services (including nurse’s board where paid by the taxpayer), medical, laboratory, surgical, dental and other diagnostic and healing services, X-rays, medicine and drugs (as defined in subparagraph (2) of this paragraph, subject to the 1-percent limitation in paragraph (b) of this section), artificial teeth or limbs, and ambulance hire. However, an expenditure which is merely beneficial to the general health of an individual, such as an expenditure for a vacation, is not an expenditure for medical care.

IRS Notice 2015-17:

Question 4 (Increases in employee compensation to assist with payments of individual market coverage): If an employer increases an employee’s compensation, but does not condition the payment of the additional compensation on the purchase of health coverage (or otherwise endorse a particular policy, form, or issuer of health insurance), is this arrangement an employer payment plan?

Answer 4: No. As described in Notice 2013-54, an employer payment plan is a group health plan under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy or directly pays a premium for an individual health insurance policy covering the employee, such as arrangements described in Rev. Rul. 61-146. The arrangement described in this Q&A-4 does not meet that description. In addition, because the arrangement described in this Q&A-4 generally will not constitute a group health plan, it is not subject to the market reforms.4 Providing employees with information about the Marketplace or the premium tax credit under Code § 36B is not endorsement of a particular policy, form, or issuer of health insurance.