Clarifying Health

Offering Defined Contribution Health Plans to 1099 Contractors

Wed, 08 Sep 2010 13:30:27 -0600

Note: This should not be taken as legal or tax advice.

A common question we receive at Zane Benefits is: "Can I Offer a Defined Contribution Health Plan to 1099 Contractors?"

The answer is Yes, with "but...". The "but..." is that unlike W-2 employees, 1099 contractors must report all reimbursements as income on their personal tax return.

Due to their flexibility, defined contribution health plans can be the ideal health benefits solution for 1099 contractors because:

The 1099 contractors can only use the money on health insurance and medical expenses;
Unused amounts remain with the company when the 1099 contractor is no longer working with the company;
The plans help companies recruit and retain the most talented 1099 contractors.

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What Types of Individual Health Insurance Premiums Can Be Reimbursed Tax Free By a Health Reimbursement Arrangement (HRA)?

Wed, 08 Sep 2010 13:30:27 -0600

Note: None of this should be taken as tax or legal advice

Health Reimbursement Arrangements (HRAs) can reimburse the following types of insurance premiums provided they were not already paid 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 insurance premiums; and
COBRA premiums;

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What Types of Individual Health Insurance Premiums Can Be Reimbursed Tax Free By a Section 125 Premium Only Plan (POP)?

Wed, 08 Sep 2010 13:30:27 -0600

Note: None of this should be taken as tax or legal advice

Section 125 Premium Only Plans (POPs) can reimburse the following types of insurance premiums provided they were not already paid 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
COBRA premiums;

Note: Long Term Care Premiums are not reimbursable by a Section 125 POP plan.

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How Employers Can Contribute to Employees' Individual Health Insurance Plans without Violating Federal Law

Wed, 08 Sep 2010 13:30:27 -0600

Note: None of this should be taken as tax or legal advice

The employer can use an ERISA and HIPAA-compliant defined contribution health plan to contribute to employees' individual health insurance costs without violating federal law.

The federal government has guidelines for employers who want to contribute to an employee's individual health insurance premiums. Specifically, the employer must take special steps to avoid "employer endorsement" of the individual plans.

To avoid endorsement of individual health insurance plans, compliance includes the following restrictions on the actions of employers:

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.

To comply with point (1) above, while still making contributions to a defined contribution health plan that can reimburse for individual health insurance premiums, employers should follow these additional guidelines:

Employers must not pressure employees to use the defined contribution to pay for individual insurance coverage.
In addition to reimbursing for health insurance premiums, employers should also allow the use of funds for qualified medical expenses.
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 defined contribution.

See Why Can't Employers Pay For Its Employees' Individual Health Insurance Plans? for more information.

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Why Can't Employers Pay Directly For Employees' Individual Health Insurance Plans?

Wed, 08 Sep 2010 13:30:27 -0600

Note: None of this should be taken as tax or legal advice

Some companies might want to pay directly for an employee's individual health insurance plans without utilizing an ERISA and HIPAA-compliant defined contribution health plan, but doing so will put the employer out of compliance with federal regulations and increase the employer's (and employee's) tax liability.

There are two major reasons an employer should never pay for its employee's individual health insurance plan:

Federal Compliance Issues - Paying for Individual Health Insurance without a Defined Contribution Plan Causes the Employer to "Endorse" the Individual Health Insurance Plans
Increased Tax Liability - Paying for Individual Health Insurance without a Defined Contribution Plan Causes the Payments to Become Taxable Income to the Employees

1. Federal Compliance Issues - Paying for Individual Health Insurance without a Defined Contribution Plan Causes the Employer to "Endorse" the Individual Health Insurance Plans

When an employer pays directly for an individual health insurance plan, they effectively endorse each employee's individual insurance plan as part of an employer-sponsored group health benefit offering. In other words, according to federal law, the employer is treating the individual plan as part of an employee welfare benefit plan regulated by ERISA. Because most individual health insurance plans, do not meet minimum ERISA group plan requirements, the employer is out of compliance.

Separately, an employer is not allowed to know the details of employees HIPAA-protected medical expenses. Because most individual health insurance costs are based on an employee's health, the health insurance details must be HIPAA protected. When an employer pays for the individual policy, they can violate HIPAA-privacy requirements because they know the details of a HIPAA-protected employee expense.

The federal government has guidelines for employers who want to contribute to employee's individual health insurance premiums without violating the HIPAA and ERISA regulations.

An ERISA and HIPAA-compliant defined contribution health plan will ensure compliance with federal law.

2. Increased Tax Liability - Paying for Individual Health Insurance without a Defined Contribution Plan Causes the Payments to Become Taxable Income to the Employees

If an employer pays for employee's individual health insurance premiums without utilizing a defined contribution health plan, such payments must be reported as taxable income to the employees.

The IRS requires that legal plan documents be established in order for employees to deduct the individual health insurance premiums from taxable income on the annual W-2.

An IRS-compliant defined contribution health plan will ensure the tax deductibility of employee's individual health insurance premiums.

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