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Small Business Employee Benefits and HR Blog

New Federal Guidance Potentially Targets Lower-Income Employees of Small Employers

Background

On March 23, 2010 the Affordable Care Act (Obamacare) was passed which states that:

(1) U.S. Citizens must purchase comprehensive health insurance ("Minimal Essential Coverage") beginning January 1, 2014;

(2) Small employers (<50 employees) are not required to provide comprehensive health insurance for their employees; and

(3) Lower-income employees not covered by a comprehensive employer-sponsored health insurance plan (an "Eligible Employer-Sponsored Plan") are eligible to receive income-based subsidized health insurance from the Health Insurance Marketplace (i.e. Exchange) operating in each state.

Approximately 35 million U.S. citizens work for small employers who cannot afford to offer comprehensive employer-sponsored health insurance. Millions of these employees currently participate in a "medical reimbursement plan" where they receive contributions from their employer towards their health insurance via a monthly allowance, typically between $50 and $200 per month.

Technical Release 2013-03

On September 13, 2013, the federal government issued Technical Release 2013-03. This release implies that a limited medical reimbursement plan of any amount will be considered to be an "Eligible Employer-Sponsored Plan" for purposes of the Affordable Care Act. This conflicts with the legal definition of an "Eligible Employer-Sponsored Plan" in the 2010 Affordable Care Act which clearly defines an "Eligible Employer-Sponsored Plan" to be only comprehensive employer-sponsored health insurance plans (see IRC 5000A).

The Technical Release, until it is corrected, is particularly troubling because: 

(1) The Affordable Care Act states that an "Eligible Employer-Sponsored Plan" qualifies as Minimum Essential Coverage required for all U.S. citizens. Thus, until corrected, the Technical Release implies that an employee receiving only $50 per month from a medical reimbursement plan would be exempted from the requirement ("Individual Mandate") to purchase comprehensive health insurance ("Minimum Essential Coverage"). 

(2) Employees participating in an "Eligible Employer-Sponsored Plan" are ineligible to receive income-based subsidized individual health insurance from the new Health Insurance Marketplaces (i.e. Exchanges). Thus, the Technical Release implies a lower-income employee receiving as little as $50 per month from a medical reimbursement plan would be ineligible to receive income-based subsidized individual health insurance. This completely contradicts the intent of the Affordable Care Act requiring each state to set up a Health Insurance Marketplace (i.e. Exchange) -- to provide subsidized (i.e. "affordable") health insurance to lower-income citizens not covered by a comprehensive employer-sponsored health insurance plan. 

(3) If this implication was correct, to get around #2 above, lower-income employees needing Exchange-based subsidized health insurance would have to voluntarily reject participating in their employer's limited medical reimbursement plan (incorrectly potentially deemed by the IRS to be comprehensive health insurance). This is grossly unfair. Lower-income employees would be denied an employer benefit that is freely available to their fellow higher- and middle-income employees. Moreover, this contradicts with ERISA and decades of employee benefit laws which have established that all employees in the same class should receive the same benefits.

It is highly unlikely that the federal government, through regulation, meant to circumvent these three important cornerstones of health care reform only for employees of small employers: (1) The Individual Health Insurance Mandate; (2) Subsidized Health Insurance for lower-income citizens not covered by employers; and (3) Ability for (only) lower-income employees to receive partial health insurance premium contributions from their employers.

We await and look forward to further guidance from the federal government on this issue.

-Paul Zane Pilzer

Professor Paul Zane Pilzer is an economist, author, and former regulatory official in two U.S. Presidential administrations.

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