Employer Funding of Individual Health Insurance – The Rules Are Changing

Earlier this year, I wrote about HRAs and Colorado law, looking closely at the Colorado Division of Insurance’s stance regarding the use of HRA funds to pay individual health insurance premiums.  Long story short, in 2009 the DOI had basically said that HRA funds could not be used to purchase individual health insurance, because the policies would have to conform to the provisions of Article 16, which applies to group health insurance (individual policies don’t have the same mandates, coverage, or underwriting standards as group policies, so they would not be able to conform to the provisions of Article 16).  But then at the end of last year, the DOI revisited the HRA question, and published a final agency order regarding the use of HRA funds to purchase individual health insurance.   They reversed their earlier position, and said that HRAs could be used to purchase individual health insurance.  They included a restriction on the use of HRA funds to purchase CoverColorado policies, as they wanted to discourage employers from shifting sick employees off of a group health insurance plan and onto the state subsidized high risk pool coverage.

This seemed to settle the matter for the most part, but now it’s gotten a bit stickier again.

We recently received a notice from Humana about a new state-mandated page that will be added to their individual health insurance policy, and I’m sure we’ll be getting a similar notification from the other carriers shortly.  In a nutshell, the new application page asks whether or not an employer (with 50 or fewer employees) will be paying (directly or via reimbursement) for any portion of the health insurance policy, including by means of an HRA.  If the answer is yes, then the applicant has to state whether or not the employer has had a group policy in place in the past twelve months.  If the answer to that question is yes, then the applicant will be ineligible for coverage under Colorado law.

Huh?  I knew that the DOI had sorted out the HRA issue several months ago, and I didn’t remember anything about a requirement that no group plan have been in place for 12 months before the HRA funds could be used to purchase individual health insurance.  I called the DOI, but all they could direct me to was that same final agency order, and they acknowledged that it doesn’t say anything about a 12 month waiting period between coverage under a group plan and eligibility to use HRA funds for an individual policy.

Then I remembered Senate Bill 19.  It was signed into law in March, and was meant to give employers more freedom to seek out less expensive ways of covering at least some of the cost of their employees’ health insurance premiums.  SB19 allows employers to reimburse their employees for health insurance premiums, either by wage adjustments or through an HRA, as long as the employer has not had a group policy in place in the previous twelve months.  This is a major change from the previous law, which forbid any type of wage adjustment to reimburse employees for individual health insurance premiums.  But it seems that it might have actually made things more restrictive when it comes to HRAs.

I’ve read everything I can find regarding the use of HRA funds for individual health insurance, and I wasn’t aware of any restriction that prevented an employer from dropping a group plan and going directly to a HRA (if anyone is aware of restrictions of this nature that existed prior to SB19, please leave a comment with details).  SB19 appears to relax the restrictions on employers with regards to funding individual health insurance policies, but when it comes to HRAs, that does not appear to be the case.  Because of the new law, employers can now use wage adjustments to reimburse employees for individual policies (as long as they haven’t had a group policy in the past twelve months), which wasn’t allowed at all in the past.  But the use of HRAs to fund individual policies can now only be done if the employer hasn’t had a group policy in the past twelve months, and that restriction wasn’t found in the DOI final agency order regarding HRAs.

It appears that SB19 has both relaxed and tightened the rules, depending on how you look at it.

About Louise Norris

Louise Norris has been writing about health insurance and healthcare reform since 2006. In addition to the Colorado Health Insurance Insider, she also writes for healthinsurance.org, medicareresources.org, Verywell, Spark by ADP, and Boost by ADP, and Gusto. Follow on twitter and facebook.

Comments

  1. Health Wonk Review: Olio Edition now online, and your post’s in it:

    http://insureblog.blogspot.com/2011/11/health-wonk-review-olio-edition.html

    Please let your readers know.

    And a friendly reminder to newbies and regulars alike – while we haven’t made it mandatory to give a link back, it’s the way that carnivals work best. If your submitted post has been included in an HWR issue, please remember to post about it on your blog because it helps us all.

    Thanks!

  2. I testified on behalf of SB19 in both the House and Senate. The restriction you are seeing is a result of SB19. It was the compromise that allowed SB19 to pass. And, just for the record, at least part of the reason that DORA issued their final agency order to withdraw Notice O-11-064 was the stir created by the events that led to passage of SB19. SB19 is not onerous, it is a compromise. The 12 month restriction only applies to businesses withdrawing from the group market. SB19 is silent on an individual’s health insurance status, only whether the corporate payer behind the HRA dropped a group plan. Moral: If you’re a business, don’t drop your group plan. You’re lucky to be able to get one in the first place.

    • I understand that the 12 month restriction was a compromise, and that if employers are able to keep their group plan in place, that’s the best scenario for their employees. But to say “if you’re a business, don’t drop your group plan. You’re lucky to be able to get one in the first place” is a bit unfair. What if the business in question simply cannot afford to keep its group plan? Very small businesses (say 10 or fewer employees) are particularly hard hit by health insurance premiums that rise dramatically year after year. If they eventually are unable to continue to afford coverage, dropping their plan becomes a matter of necessity rather than a choice. Because of the restriction in SB19, that employer is then forbidden from helping its employees pay for individual health insurance for the following 12 months.

      There’s more than one way to look at this, and unfortunately, the economic realities of being a small business don’t always allow for group health insurance benefits.

  3. 1-person S-corp owner here in Colorado. Can I as the individual purchase a high deductible health plan, and then have the corporation reimburse me for the premiums? From what I understand, technically an HRA is not linked in any way to an HSA or HDHP, despite being the same kind of reimbursement idea. (As a side note and separate issue, the corporation does already fund my HSA).

    I, too, see the first question on my health insurance application and am confused, because the employer (me) is trying to reimburse the premiums that I as the individual and paying. From what I understand, it’s a pretty standard thing to do – so is it just that Colorado is trying to stop this?

    • Hi Bob. Sorry for the delay in replying – I didn’t see your comment until today. I think what you’re describing is perfectly fine. Jay and I are the sole owners/employees of our S-corp too, and we use the IRS guidelines you described in your next comment. Our corporation reimburses us for our health insurance premiums, and then the amount that’s reimbursed is included in our W2s, so we’re able to deduct it when we file our taxes.

      I believe the key here is that owners (greater than 2% shareholders according to IRS guidelines) are treated differently than non-owner employees. And Senate Bill 19 also specifically pertains to employers who had a group plan in place during the past 12 months. So if you had employees and you were providing a group health insurance plan, the rules in SB19 would apply… if you were to drop your group plan, you wouldn’t be able to provide your employees with wage reimbursement or HRA reimbursement for individual premiums for 12 months. But in your case, you don’t have employees. The only person involved is yourself, and you’re a >2% shareholder of your S-corp. You’re also not switching from a group plan, as far as I can tell from your comment (a corporation simply funding an HSA does not count as having an employer plan – I assume the HDHP was established in your own name?).

      As always, there’s a disclaimer here… my focus is health insurance, not taxes. I’m not a tax professional, so make sure you check with someone who is before making decisions.

  4. Additionally, from IRS notice 2008-1:

    Effective 2008, if you are a >2% shareholder of an S-Corporation whether your health insurance policy is in your personal name or the company’s you can deduct the value of the premiums as an adjustment to gross income as long as the value is included in your W-2 wages. Either the corporation can pay the premiums directly or you can have them reimbursed. If you don’t include the premiums in your wages you can’t take the deduction.

    So it appears that Colorado has setup a law that contradicts the federal IRS. What am I missing?

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