This section summarizes the key compliance rules when reimbursing employees tax-free for individual health insurance though a Premium Reimbursement Arrangement.
There are three IRS rules that tax-preferred Premium Reimbursement Arrangements must follow:
The IRS requires that written Plan Documents are established and maintained. Plan Documents define what expenses are eligible for reimbursement, the amount of employer contribution, and other required details about the reimbursement plan.
The IRS requires that employees submit proper documentation verifying their reimbursement request, and that supporting documentation is saved on file for ten years.
The reimbursement plan must comply with IRS non-discrimination rules. The rules state the plan must not discriminate in favor of highly compensated individuals (HCIs) with respect to eligibility to participate in the plan or benefits provided under the plan.
Annual Limit Compliance (PHS Act 2711)
Preventive Care Compliance (PHS Act 2713)
90-Day Waiting Period Compliance
Internal and External Claims Appeal Process
Dependent Coverage for Adult Children up to Age 26
Uniform Explanation of Coverage and Definitions
Form 720 Comparative Effectiveness Research (CER) Fee
Form 5500 Series Form (Annual Report)
60-Day Notice of Material Modification
There are two ERISA rules for premium reimbursement plans:
Self-insured medical reimbursement plans are employee welfare plans under ERISA. ERISA requires every (welfare) plan to have a Summary Plan Description (SPD) and to furnish copies to each participant. The SPD is the primary vehicle for informing participants and beneficiaries about their rights and benefits under their employee benefit plans.
The employer must not endorse specific individual health insurance policies or pay directly for them. The employer should not get involved in the purchase or selection of employee’s individual health insurance policies.
Self-insured medical reimbursement plans are governed by HIPAA Privacy Rules. In order to administer the reimbursement plan correctly, the entity processing employee reimbursement claims receives Protected Health Information (PHI) that is required to be held confidentially under HIPAA.
In order to comply with HIPAA, an employer should contract with a third-party processor (such as a premium reimbursement software provider) to review all reimbursement requests so the employer does not come in regular contact with PHI.
Lastly, self-insured medical reimbursement plans with 20 or more participants are subject to COBRA. Employers must give terminated employees the option to continue their participation in the reimbursement plan for a period after termination, and may charge an employee up to 102% of the value of their allowance if COBRA is elected.