Addressing Employee Health Plan Exception Requests: Part VI

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Addressing Employee Health Plan Exception Requests: Part VI

By Brian Gilmore | Published September 8, 2022

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.

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:

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 of a HRA or wellness program that is integrated with the health plan.

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 plans.

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.

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.

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.

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.

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.

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.

§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.

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 health 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 health 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.

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 health 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. 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.

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.