Note: This should not be taken as legal or tax advice.
A common question we receive at Zane Benefits is: "Can I Offer a
Defined Contribution Health Plan to 1099 Contractors?"
The answer is Yes, with "but...". The "but..." is that unlike W-2 employees, 1099 contractors must report all reimbursements as income on their personal tax return.
Due to their flexibility, defined contribution health plans can be the ideal health benefits solution for 1099 contractors because:
- The 1099 contractors can only use the money on health insurance and medical expenses;
- Unused amounts remain with the company when the 1099 contractor is no longer working with the company;
- The plans help companies recruit and retain the most talented 1099 contractors.
Note: None of this should be taken as tax or legal advice Section 125 Premium Only Plans (POPs) can reimburse the following types of insurance premiums provided they were not already paid with pre-tax dollars:
- Major medical individual health insurance premiums
- Limited benefit individual health insurance premiums
- Dental care and Vision care premiums
- Qualified Ancillary premiums (e.g. accident policies)
- Medicare Part A or B, Medicare HMO, and employer-sponsored health insurance premiums
- Medicare Advantage and Supplement premiums
- COBRA premiums;
Note: Long Term Care Premiums are not reimbursable by a Section 125 POP plan.
Note: This should not be taken as tax or legal advice
HRAs, POPs and Tax-free Individual Health Insurance are 100% allowed in Texas if administered the correct way.
The person (Bill Bingham) responsible for this bulletin has since retired. In 2006 (when this bulletin was written), Mr. Bingham strongly believed, that:
“If an employer reimburses insurance premiums through an HRA or allows pre-tax deductions from employer paid salaries through a cafeteria plan, the arrangement is an employee welfare benefit plan providing medical care to employees through the reimbursement of premiums or otherwise."
However, ERISA has a safe harbor regulation that declares that ERISA does not apply to arrangements where employers make no contributions to the purchase of group or group-type insurance but merely make such insurance available to employees should they voluntarily choose to enroll in such coverage (see
29 C.F.R. § 2510-3-1(j)).
According to the 2006 Bulletin B-0028-06:
"TIC §1501.003 states that an individual or group health benefit plan[1] is a small employer health benefit plan subject to Insurance Code Chapter 1501 if it provides health care benefits covering two or more eligible employees of a small employer and
(1) The employer pays a portion of the premium or benefits;
(2) The employer or a covered individual treats the health benefit plan as part of a plan or program for purposes of Section 106 or 162 of the Internal Revenue Code; or
(3) The health benefit plan is an employee welfare benefit plan under 29 C.F.R. Section 2510.3-1(j).
Texas Insurance Code §1501.004 contains similar provisions for a large employer.
...
Under TIC §§1501.003(3) and 1501.004(3), if a health benefit plan is an employee welfare benefit plan under 29 C.F.R. Section 2510.3-1(j), the plan is subject to the group health provisions of TIC Chapter 1501.”
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Individual policies reimbursed by
ZanePOP can
not be made subject to this regulation because, with ZanePOP:
- The employer does not pay a portion of the premium or benefits for the individual health insurance policy;
- The employer/employees do not treat the individual health insurance plan as a part of a plan or program for purposes of Section 106 or 162; and
- The individual plan is not an employee welfare benefit plan under 29 C.F.R. Section 2510.31-1(j).
The non-applicability of TIC Section 1501.003 to individual policies reimbursed by ZanePOP should be straightforward. Please post questions in the comment section.
Similarly, individual policies reimbursed by
ZaneHRA can
not be made subject to this regulation because, with ZaneHRA:
- The employer does not pay a portion of the premium or benefits for the individual health insurance policy;
- The employer/employees do not treat the individual health insurance plan as a part of a plan or program for purposes of Section 106 or 162; and
- The individual plan is not an employee welfare benefit plan under 29 C.F.R. Section 2510.31-1(j).
The non-applicability of TIC Section 1501.003 to individual policies reimbursed by ZaneHRA should be straightforward, but I will go into more detail here because this is where most of the confusion exists.
The ZaneHRA itself is the "Plan", not the health care items reimbursed by the "Plan". In other words, ZaneHRAs are qualified ERISA- and HIPAA-compliant employee welfare benefit plans. However the medical items (e.g. pharmacy, insurance policy costs, doctor visits, etc.) for which each employee chooses to seek reimbursement from their ZaneHRA, are not part of an employee welfare benefit plan.
The federal government has guidelines for employers who want to allow insurers or their representatives access to their employees without triggering ERISA plan status and the associated liabilities. ZaneHRA is designed to comply with these guidelines.
Compliance includes the following restrictions on the actions of employers:
- Employers must not be involved in employees' decision to purchase individual health insurance, or their decision on which insurer or plan to use. They must not get involved in any negotiations with an insurance carrier over price or benefits of individual health insurance plans, and must not provide employees with claim forms or other materials related to their individual health insurance policies.
- Employers may not directly pay premiums on individual health insurance policies. They must not receive any compensation from an insurance carrier in connection with an employee's individual health insurance policy. Employers must not become involved in any claim dispute between an employee and an insurance carrier; all inquiries must be directed to the insurer.
To comply with point (1) above, while still making contributions to an HRA that can reimburse for individual health insurance premiums, employers must follow these additional guidelines:
- Employers must not pressure employees to use the money in their HRA to pay for individual insurance coverage. Employers may require HRA participants to have health insurance coverage to participate in their HRA provided this requirement is waived for participants medically unqualified to obtain health insurance (e.g. rejected, uprated, excluded).
- In addition to reimbursing for health insurance premiums, employers should also allow the use of HRA funds for qualified medical expenses.
- Employers must limit their role to simply reimbursing qualified medical expenses as directed by the ZaneHRA plan.
A
POP (Premium only Plan) is a Section 125 Cafeteria Plan. Internal Revenue Service (IRS) Notice 2002-24 suspended the
Form 5500 filing requirement for cafeteria plans. However, if the plan provides ERISA benefits, it is a welfare benefit plan and the employer must file a Form 5500 annual if the plan had 100 or more participants in the plan year.
On April 27, the IRS issued
Notice 2010-38 which expands the health care tax exclusion for adults below the age of 27 as of the end of the taxable year.
Effective March 30, 2010 employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child. This new age 27 standard replaces the lower age limits that applied under prior tax law. It also replaces the requirement that a child generally qualify as a dependent for tax purposes. The definition of "Child" includes children of employee/spouse, step children, adopted children and foster children. There is no requirement that the child be a "dependent" for tax purposes.
Section 125 Cafeteria Plans
The notice clarifies that employers with
Section 125 plans may allow employees to make pre-tax contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals (plans have until the end of 2010 to amend their cafeteria plan language).
Health Reimbursement Arrangements (HRAs) The notice clarifies that expenses incurred by a child under age 27 may be reimbursed from a
Health Reimbursement Arrangement (HRA).
Health Savings Accounts (HSAs)
The notice does not reference
Health Savings Accounts (HSAs). Because the
health reform bill did not amend the section of the code that governs HSAs, it appears that expenses incurred for an adult child who does not qualify as a tax dependent cannot be reimbursed from an HSA.
