Before the enactment of the Affordable Care Act, employers frequently used “premium reimbursement arrangements” to reimburse employees for premiums paid for coverage purchased on the individual market. However, recent federal guidance has caused employers to question whether a common arrangement — reimbursing new, current and former employees for COBRA coverage premiums — would violate any ACA market reforms. The answer generally provides some good news for employers — as long as they consider the ACA compliance issues.
Standing alone, premium reimbursement arrangements likely would fail to comply with a number of ACA requirements, such as the prohibition on annual limitations and the requirement to cover of preventive services without cost, and could trigger an excise tax under Section 4980D of the Internal Revenue Code. In their guidance, the U.S. Departments of Labor, Health and Human Services and Treasury clarified that premium reimbursement arrangements will not violate the ACA market reforms when they are integrated with (or part of) a group health plan (as opposed to coverage purchased on the individual market) that otherwise complies with the ACA market reforms.
But would reimbursing new, current and former employees for COBRA coverage premiums violate any ACA market reforms? In general, reimbursing these employees for COBRA premiums should be permitted as long as the underlying group health coverage complies with the ACA market reforms. This is because the premium reimbursement is “integrated” with the group health coverage being offered under COBRA. Although reimbursing COBRA premiums generally should be permitted, below are the ACA compliance issues to consider.
A common practice for employers is to include COBRA premium reimbursement in severance packages offered to departing employees. For example, an employer might reimburse all or part of the COBRA premium for six months following termination, with the full COBRA premium becoming payable by the employee after six months. This practice is generally acceptable from an ACA compliance perspective. However, employers should be very clear in explaining the impact that accepting COBRA coverage will have on the ability to enroll in individual coverage purchased from a health insurance marketplace.
Open enrollment in the marketplace begins on Jan. 1 and ends on Feb. 15. If an individual does not purchase marketplace coverage during open enrollment, he or she must wait until the next open enrollment period unless the individual experiences a special enrollment event. Special enrollment events include, among other things, the loss of coverage due to termination of employment or a reduction in hours or the end of the COBRA period. The end of a subsidized or reimbursed COBRA premium period is not a special enrollment event. Therefore, although it may be attractive for an employee to enroll in COBRA coverage if all or part of the premium will be reimbursed for a limited period, the decision to enroll in COBRA coverage could turn out to be a bad deal for the employee when the full COBRA premium kicks-in and the employee is unable to enroll in Marketplace coverage until the next open enrollment period.
On occasion, a new employee will negotiate with a new employer for reimbursement of his or her premiums for COBRA coverage under a prior employer’s group health plan for a certain period. There are a number of reasons new employees might negotiate for this, including: (1) prior satisfaction of cost-sharing and out-of-pocket maximum requirements under the prior employer’s plan; (2) preferential coverage under the prior employer’s plan; or (3) a waiting period under the new employer’s plan. Whatever the reason, the COBRA coverage under the prior employer’s plan should be considered group health coverage and a premium reimbursement arrangement can be integrated with that COBRA coverage.
Nonetheless, employers should consider the impact that this practice will have under the employer shared responsibility requirement. For example, even though the premium reimbursement arrangement in this situation is integrated with the prior employer’s COBRA coverage, the new employer cannot rely on the COBRA coverage to claim that it has made an offer of minimum essential coverage providing minimum value. Accordingly, the new employer could be subject to an employer-shared responsibility penalty if it doesn’t also offer coverage under its own group health plan. Of course, if the reimbursement arrangement is of limited duration, an employer could rely on the 90-day waiting period to limit exposure to potential penalties.
Employers also should consider the administrative issues associated with reimbursing COBRA premiums paid to a previous employer’s plan. For example, if the reimbursement is to be made on a pre-tax basis, the employee will need to first substantiate that he or she actually paid the COBRA premium. This will require the employer to adopt some form of substantiation procedure for these types of arrangements. As an alternative to premium reimbursement arrangements, an employer simply could provide the employee with unrestricted cash. The employee then could choose to pay COBRA premiums with the cash or could use it for anything else. This alternative would avoid administrative issues associated with pre-tax reimbursements and would avoid any potential concerns under the ACA.
Although the Departments’ recent guidance curtails the use of premium reimbursement arrangements for purposes of reimbursing coverage purchased on the individual market, reimbursement of COBRA premiums is generally a viable option for the time being. When providing for COBRA premium reimbursements, employers should consider whether any of the ACA’s market reforms will be implicated. As always, employers also should seek advice from experienced counsel when considering whether any benefit program complies with the ACA. Often, a key compliance review element is to analyze how the facts of a given situation may impact the legal analysis.