More and more, small businesses are using premium reimbursement plans as an alternative to small group health insurance. Here are ten do's and don'ts about premium reimbursement.
Premium Reimbursement 101
First, what are we talking about when we say "premium reimbursement"?
In this article, we are referring to an arrangement where the employer provides reimbursement to employees for individual or family health insurance plans that they purchase directly, with their own money. Employers can provide reimbursement for premiums, however they should set up a formal plan and be aware of the do's and don'ts. We'll cover this, and other best practices below.
Tip: Sometimes you'll hear about premium reimbursement being employee-funded (aka a Premium Reimbursement Arrangement or PRA). In this article, we are focusing on an employer-funded arrangement.
The Do's and Don'ts of Premium Reimbursement
1) Do Set Up a Formal Section 105 Arrangement
The first best practice is to set up a formal Section 105 medical reimbursement plan. Some businesses consider reimbursing employees for premiums without setting up a formal arrangement. They consider bonusing or giving raises to employees for their personal health insurance, or actually paying for the premiums directly. However, using a formal Section 105 plan saves the employer and employees money (because of the tax savings), and keeps the business compliant with federal regulations including the Affordable Care Act's new "market reforms".
See related article: Why Businesses Should Never Pay Personal Health Insurance Premiums
2) Do Set Affordable Contribution Amounts
How much the business contributes is 100% up to them. As such, set monthly "allowances" at a rate the business can sustain. It is always better for employee relations to increase the benefit level rather than decrease the benefit level.
3) Do Use Section 105 Software
There are two main reasons using Section 105 Software is a best practice: 1) Time savings/ease of use, and 2) Tax-savings/compliance.
Section 105 Software (aka Defined Contribution Software) allows the business to administer the plan 24/7 online, easily add reimbursements to payroll, and change plan design (and plan documents) at any time, with no additional fees. Software makes it easy for employees to view their allotment amount in real time and submit requests for reimbursement anytime, online.
Section 105 Software also ensures that the plan is set up and administered to comply with the most recent federal regulations, including the Affordable Care Act's new "market reforms".
4) Do Select an Insurance Broker
With this type of arrangement, employees purchase individual health insurance. Work with an insurance broker to help employees select and purchase individual health insurance policies. Select an insurance broker familiar with individual health insurance policies, Section 105 plans, the individual premium tax credits, and health care reform.
5) Do Understand What Types of Premiums Can Be Reimbursed
Premium reimbursement plans (using a Section 105 plan) can reimburse the following types of insurance premiums -- provided they were not already paid for 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
Long-term care premiums
6) Don't Get Involved with the Selection or Purchase of Employees' Individual Health Insurance Policies
The federal government has guidelines for employers who want to contribute to an employee's individual health insurance premiums. To avoid endorsement of individual health insurance plans:
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.
Employers must not pressure employees to use the reimbursement plan to pay for individual insurance coverage.
- Employers must limit their role to simply verifying that a qualified medical expense (such as an individual health insurance premium) was incurred, and then reimbursing such amount from the reimbursement plan.
Again, using a third-party Section 105 Software provider (who also reviews all claims for reimbursement), creates a safeguard for employers. And, having a health insurance broker there to help provides employees additional support.
Download this free eBook: Compliance 101.
7) Don't Let Employees Contribute
Section 105 medical reimbursement plans are, by definition, 100% employer-funded. Allowing employees to contribute invalidates the tax benefits of the reimbursements.
8) Don't Forget to Educate Employees
Don't forget to educate employees on the new advantages of individual health insurance (vs group health insurance), how to request and receive reimbursement, and how to get questions answered if they have them. This will contribute to employee education, understanding, and satisfaction.
9) Don't Pre-Fund a Third-Party Bank Account - There's No Need To
A big benefit with using a Section 105 plan is that it's a notional arrangement and all funds stay with the business until an expense is approved and reimbursed directly from the business to the employee (via payroll, check, direct deposit, etc). This means you are not required to pre-fund third party bank accounts.
10) Don't Self-Administer the Plan
As we mentioned in #1, self-administering a premium reimbursement plan puts the small business at risk of violating IRS (tax benefits), HIPAA (medical privacy), ERISA, and ACA (health care reform) compliance issues. Using Section 105 Software is a best practice because they ensure up-to-date compliance, and make administration a quick, 5-minute per month task.
Questions on best practices? Leave a comment below.