Group Health Plans are Expensive – Are There Any Alternatives?

Although employers have a couple of options, each alternative comes with legal and financial risks. Ultimately, seeking legal and/or financial counsel before implementing any changes is best.

Opt-out agreement

The first option is to offer employees an opt-out agreement. Opt-out agreements allow employees to opt out of the employer’s group health plan in exchange for an incentive, which is usually additional compensation. If additional compensation is offered, that payment is considered part of the employee’s premium contribution when determining affordability under the Affordable Care Act (“ACA”), unless the employee opts out under an “eligible opt-out agreement.” “Eligible opt-out agreements” are opt-out agreements in which the employee provides proof of minimum essential coverage, other than individual market coverage. (E.g., coverage under a spouse’s employer-provided plan.)

Opt-out agreements should be offered under a Section 125 cafeteria plan. Otherwise, the IRS may take the position that all eligible employees had “constructive receipt” of the opt-out payment and consider it part of each employee’s income – even those who did not elect the opt-out. Additionally, employers should be mindful that certain states (e.g., California) may consider opt-out payments when calculating an employee’s regular rate of pay. This could affect overtime pay amounts under the Fair Labor Standards Act.

Reimbursement

A second option for employers is to offer healthcare reimbursement agreements (HRAs). There are two types of HRAs: qualified small employer HRA (“QSEHRA”) and individual coverage HRA (“ICHRA”). ICHRAs apply to employers with 50 or more full-time employees, while QSEHRAs apply to employers with less than 50 full-time employees.

HRAs allow employers to reimburse employees for healthcare costs, including premiums, outside of a group plan. Essentially, employers set aside a fixed, tax-free amount of money for each employee. Upon receipt of eligible expenses, the employer then distributes reimbursements as expenses are incurred. Notably, employers cannot offer both a group health plan and an ICHRA to the same set of employees.

The legal considerations

No matter what is offered, employers cannot violate anti-discrimination laws. The Americans with Disabilities Act prohibits discrimination based on disability. And, more specifically, the Health Insurance Portability and Accountability Act prohibits assessing healthcare premiums based on health factors. Consequently, opt-out agreements and HRAs cannot be targeted towards high-claim employees. Instead, these agreements should be offered to all eligible employees on a completely voluntary basis.

OER assistance

If you have questions and would like to discuss these options further, Optimal Employee Relations is here to help. Get started by filling out our contact form below.