Question: What are the issues preventing an employer from reimbursing an employee’s out-of-pocket medical expenses?
Compliance Team Response:
The main concern is that an employer’s reimbursement of a medical expense creates a group health plan that has to comply with the full array of laws governing employer-sponsored group health plans.
Medical expenses are defined by §213(d), and summarized nicely in IRS Publication 502.
Common examples of where an employer wishes to reimburse all or a portion of an employee’s or dependent’s medical expense outside of a formal ERISA group health plan:
- Cost-sharing under the group health plan (i.e., deductibles, copays, coinsurance)
- Items or services not covered by the group health plan
- Services not covered sufficiently by the group health plan (e.g., infertility expenses, autism-related expenses, transgender reassignment surgery-related expenses, mental health expenses)
- Out-of-network providers under the group health plan
- High-cost pharmaceuticals
- Medical wellness expenses outside of a wellness program integrated with the group health plan
Any form of reimbursement of these medical expenses by an employer triggers ERISA, ACA, COBRA, HIPAA, HSA, and other group health plan-related legal compliance issues. In other words, whether the employer formally recognizes it or not, it effectively creates a new group health plan anytime it reimburses an employee’s medical expenses.
The Alterative: How to Avoid Inadvertently Creating a Group Health Plan
The employer can always provide additional taxable cash compensation to employees that is not conditioned in any way on the employee’s actual medical expenses incurred. For example, the employer can provide an employee experiencing unexpected medical expenses with a standard raise/bonus/stipend that is taxable and subject to withholding and payroll taxes.
This could not be a direct or indirect reimbursement of any medical expenses incurred (taxable or non-taxable). In other words, the employer could not condition the additional payment on the employee’s submission of medical receipts, or determine the amount of the payment based on the actual medical expenses incurred by the employee. Any such form of reimbursement would trigger a group health plan and the issues outlined below.
Medical Expense Reimbursement: Group Health Plan Issues
The following is a high-level introductory overview of the issues and considerations that come with reimbursing a medical expense:
- In general, the only way to structure a separate medical reimbursement program is to make it a health reimbursement arrangement (HRA) that is integrated with the employer’s major medical plan. The reason is that a stand-alone HRA would violate multiple ACA requirements and result in a potential penalty of $100/day/employee.
- Medical expenses are defined by Internal Revenue Code §213(d). The best summary of what qualifies as a medical expense is from IRS Publication 502: https://www.irs.gov/pub/irs-pdf/p502.pdf
- In order to be an integrated HRA, the program would have to be available only to employees actually enrolled in the employer’s major medical plan (or verified to be enrolled in another employer-sponsored group health plan—not an individual policy—meeting certain ACA standards).
- An HRA is also subject to numerous compliance and administrative obligations, including ERISA plan document and SPD, COBRA, Section 105(h) nondiscrimination testing, COBRA election rights, HIPAA privacy and security controls, and claim substantiation requirements. HRAs are rarely administered in-house for this reason. Typically this would be administered by the same TPA that administers the employer’s FSA.
- The HRA would need to be carefully structured to avoid it from blocking employees from HSA eligibility. The two options would be: a) not offer the HRA to any employee enrolled in the HDHP, or b) make the HRA available only after the employee has satisfied the statutory HDHP minimum deductible ($1,350 self-only/$2,700 family in 2019) in expenses covered by the HDHP (excluded expenses do not count). Pre-deductible HRA coverage would cause any covered employee to lose HSA eligibility (i.e., the ability to make or receive HSA contributions).
- HRAs are a non-taxable benefit to the employee. Furthermore, because the employee is not taxed on the HRA benefits, the employer avoids the employer-share of payroll taxes associated with any taxable payment.
- If the company were to make the benefits taxable, then it would no longer technically be an HRA. There is no formal name for that approach—although we would typically refer to it as a “taxable HRA.” However, it would still be a group health plan subject to all of the requirements described above (with the exception of the §105(h) nondiscrimination testing requirements) if it reimbursed medical expenses—even if those reimbursements were taxable income to the employees.
- Note that the insurance carrier policies frequently require approval from the carrier to offer an HRA alongside a fully insured medical plan.
Employers should avoid reimbursing employees for any out-of-pocket medical expenses to prevent the inadvertent creation of a new group health plan (generally an HRA) that comes with a long list of compliance issues.
(a) Group health plan.
For purposes of this part—
(1) In general. The term “group health plan” means an employee welfare benefit plan to the extent that the plan provides medical care (as defined in paragraph (2) and including items and services paid for as medical care) to employees or their dependents (as defined under the terms of the plan) directly or through insurance, reimbursement, or otherwise. Such term shall not include any qualified small employer health reimbursement arrangement (as defined in section 9831(d)(2) of the Internal Revenue Code of 1986).
(2) Medical care. The term “medical care” means amounts paid for—
(A) the diagnosis, cure, mitigation, treatment, or prevention of disease, or amounts paid for the purpose of affecting any structure or function of the body,
(B) amounts paid for transportation primarily for and essential to medical care referred to in subparagraph (A), and
(C) amounts paid for insurance covering medical care referred to in subparagraphs (A) and (B) .
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