On June 13, 2019, the departments of Health and Human Services, Labor and Treasury jointly issued a final rule that will allow employers of all sizes to provide tax-free reimbursements to employees who purchase individual health insurance coverage.
Prior to 2013, reimbursement of individual health insurance premiums was a somewhat rare, but allowable practice. However, IRS Notice 2013-54 essentially ended the practice, requiring employers with such plans to terminate them entirely, transition to a traditional group health plan or face potential penalties for violating various ACA requirements, such as the prohibition on plans which impose annual limits.
Absent notice 2013-54, many small employers may have eliminated traditional group health plans and moved to an individual reimbursement model when attractive individual coverage options became widely available in the newly created individual marketplaces. The practice of reimbursing individual coverage had always been limited, because even if an employer was willing to offer reimbursements, many employees simply couldn’t get coverage in the pre-ACA individual health insurance market. The new marketplaces created under the ACA could have dramatically shifted that equation with the elimination of pre-existing condition exclusions.
The final rule allows interested employers to implement an “Individual Coverage Health Reimbursement Arrangement” (ICHRA) effective January 1, 2020. Under these formal arrangements, employees may purchase individual health plans and receive tax-free reimbursements from their employer to subsidize the cost of these plans. As is the case with other tax-advantaged benefit programs, strict rules and requirements are in place to protect employees, employers and the overall insurance market. For example, employers must generally offer the same benefit to all employees in the same class, with limitations on class sizes and the numbers of classes.
An additional complication for employers who wish to implement an ICHRA is the limited availability of affordable individual health plans. When the marketplaces first debuted in 2014 options were plentiful in most markets. However, individual marketplace options have narrowed in recent years, while unsubsidized individual premiums have often increased at a faster rate than group health insurance premiums.
The IRS has posted a FAQ with additional information here.