Question: An employer with a 90-day waiting period in its health plan wants to make an exception for an important new hire to provide immediate eligibility. If the insurance carrier approves the exception, are there any other considerations?
Compliance Team Response:
As you noted, carrier approval is a crucial consideration. Insurance carriers will pay claims only for employees and dependents who are eligible and properly enrolled pursuant to the terms of the applicable insurance policy. If the insurance carrier (or stop-loss carrier for self-insured) were ever to discover that an employee was permitted to enroll outside of the plan terms, the carrier would be within its right to deny paying all claims for that employee during the period of ineligibility. That would make the employer responsible for self-funding all claims incurred during the period at issue.
However, the ERISA plan precedent ramifications are an equally important consideration in this situation.
ERISA Plan Precedent
Under ERISA, employers are required to administer the plan in accordance with the terms of the written plan document. The plan document in this case imposes a 90-day waiting period.
If the employer makes an exception, it effectively acts as a plan amendment that must be applied consistently for all similarly situated employees. In other words, exceptions create an ERISA plan precedent requiring the plan to permit enrollment for all employees in similar circumstances. An employee denied the ability to enroll prior to 90 days in similar circumstances would have a claim for ERISA breach of fiduciary duty or claim for benefits.
The plan precedent established in this scenario would likely require that the company offer all employees the ability to enroll prior to the standard 90-day waiting period. We therefore do not recommend making eligibility exceptions to the plan’s standard 90-day waiting period.
Alternative Approach: COBRA Reimbursement for Coverage Under Prior Employer’s Plan
In some situations, employers will want to reimburse all or a portion of the cost of a new hire’s COBRA coverage through a prior employer. This is commonly designed to address any waiting period the employee has to enroll in coverage with the new employer.
a. Potential Issue with Establishing a Group Health Plan
There is an argument that reimbursing an employee’s COBRA coverage through a prior employer creates a new group health plan in the form of the reimbursement. That would be problematic for a number of legal reasons. However, this has been a long-standing industry practice without presenting any issues. So I would characterize this a more of a theoretical concern than one that is likely to present itself in practice.
b. COBRA Reimbursement Not an ACA Individual Policy Issue
There are no ACA individual policy reimbursement issues with reimbursing COBRA premiums because COBRA is not an individual policy (it’s a continuation of group coverage).
c. Taxable or Non-Taxable?
The issue with the payment method is whether the company will be treating this compensation as taxable or non-taxable. If the company is going to treat the compensation as taxable, the process does not matter. Whatever is most convenient (generally simply paying the employee the amount of the COBRA premium, plus a gross up if desired) is fine. This is the simplest approach administratively, but the downsides are a) the payments are taxable, and b) there is no guarantee the employee uses the additional amounts to pay for COBRA.
If the company wants to treat this as a non-taxable health expenditure, it will need to either:
- Pay the COBRA premiums directly to the COBRA administrator (or to the employee via check made out directly to the COBRA administrator); or
- Distribute reimbursement to the employee only upon the employee substantiating the expense (i.e., only upon the employee providing a receipt showing proof of payment).
(1) 1) Every employee benefit plan shall be established and maintained pursuant to a written instrument. Such instrument shall provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan.
IRS Publication 15-B:
COBRA premiums. The exclusion for accident and health benefits applies to amounts you pay to maintain medical coverage for a current or former employee under the Combined Omnibus Budget Reconciliation Act of 1986 (COBRA). The exclusion applies regardless of the length of employment, whether you directly pay the premiums or reimburse the former employee for premiums paid, and whether the employee’s separation is permanent or temporary.
IRS Information Letter 2006-0042:
On the other hand, if the employer makes the payments for the health insurance directly to the insurer, then the payments are not included in the employee’s gross income. See Revenue Ruling 61-146, 1961-2 C.B. 25. This holds true even if the payments are routed through the employee to the insurer, as long as the employee’s right to dispose of the funds is not unlimited. However, if the employer makes health insurance payments directly to the employee with only an understanding that the employee will purchase health insurance with them, and there is no verification of or control over the purchase, that amount is included in wages for employment tax purposes and would be subject to FICA taxes. See Revenue Ruling 75-241, 1975-1 C.B. 316.
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