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Paying Premiums for Individual Health Insurance Policies

Starting in 2014, the Affordable Care Act (ACA) may make purchasing health insurance in the individual market more accessible for individuals. Due to the ACA’s reforms and the rising costs of health coverage, some employers have considered whether they should help employees pay for individual health insurance policies instead of offering an employer-sponsored group health plan.

On Sept. 13, 2013, the Internal Revenue Service (IRS) issued Notice 2013-54 (Notice) to address how certain ACA reforms apply to health reimbursement arrangements (HRAs), cafeteria plans and other employer payment plans. The Notice is effective for plan years beginning on or after Jan. 1, 2014.

The Notice discourages employers from helping employees pay for individual policies in lieu of offering a group health plan by eliminating the tax savings associated with contributions toward individual coverage. Effective for 2014, if employers want to help employees pay their individual policy premiums, it generally must be on an after-tax basis. However, employers may continue to provide group health coverage for their employees on a tax-free basis.

This Legislative Brief outlines how employers have traditionally paid for employees’ individual policy premiums on a tax-free basis, and summarizes how the ACA affects these arrangements starting in 2014.

HRAs

HRAs have been used by employers to help employees pay for the cost of individual insurance policies on a tax-free basis. Unlike health flexible spending accounts (FSAs) and health savings accounts (HSAs), HRAs can be used to reimburse health insurance premiums. Also, unlike an HSA, an individual does not need to be covered under a high-deductible health plan (HDHP) to participate in an HRA. This has made HRAs particularly compatible with individual health insurance policies.

The Notice addresses how the ACA’s market reforms apply to HRAs, including HRAs that are not integrated with other group health coverage, or “stand-alone” HRAs. An HRA used to purchase coverage on the individual market cannot be integrated with that individual coverage, and is considered a stand-alone HRA. Some stand-alone HRAs are not subject to the ACA’s market reforms because they fall under an exception, such as retiree-only HRAs. However, beginning in 2014, stand-alone HRAs that do not fall under an exception will not be permitted due to the ACA’s annual limit prohibition and preventive care requirements.

Thus, effective for 2014 plan years, employers will not be able to offer a stand-alone HRA for employees to purchase individual coverage, inside or outside of an Exchange, without violating specific provisions of the ACA and risking exposure to severe financial penalties.

Employer Payment Plans

In Revenue Ruling 61-146, the IRS provided that if an employer reimburses an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance, the payments are excluded from the employee’s gross income under Internal Revenue Code (Code) section 106. This IRS guidance allowed an employer to pay an employee’s premiums for individual health insurance coverage without the employee paying tax on the amount.

The Notice refers to this type of arrangement as an “employer payment plan.” An employer payment plan appears to also include any tax-advantaged arrangement to pay for individual health insurance premiums, including employee pre-tax salary reduction contributions paid through a cafeteria plan.

Similar to the guidance for HRAs, the Notice provides that an employer payment plan that reimburses employees for their individual insurance policy premiums will not comply with the ACA’s annual limit prohibition and preventive care requirements. Thus, effective for 2014 plan years, these plans will essentially be prohibited.

However, an employer payment plan does not include an employer-sponsored arrangement that allows an employee to choose either cash or an after-tax amount to be applied toward health coverage. Thus, premium reimbursement arrangements made on an after-tax basis will still be permitted.

Cafeteria Plans

A Section 125 Plan, or a cafeteria plan, can be used by employers to help employees pay for certain expenses, including health insurance, on a pre-tax basis. The proposed cafeteria plan regulations from 2007 allow for the pre-tax payment or reimbursement of individual health insurance policy premiums under a cafeteria plan. However, the ACA changes this rule and prohibits cafeteria plans from paying or reimbursing premiums for individual health insurance policies, effective for 2014.

The ACA’s prohibition on including individual health insurance policies under a cafeteria plan applies to policies purchased on an Exchange and through the private market, as follows:

  • Exchange Coverage: The ACA provides that individual health insurance offered through an Exchange cannot be reimbursed or paid for under a cafeteria plan. Exchange coverage may be funded through a cafeteria plan only if the employee’s employer elects to make group coverage available through the Exchange’s Small Business Health Options Program (SHOP).
  • Non-Exchange Coverage: The Notice indicates that, effective for 2014, cafeteria plans may not be used to pay premiums for individual health insurance policies that provide major medical coverage. However, it appears that this restriction does not apply to individual policies that are limited to coverage that is excepted from the ACA’s market reforms, such as retiree-only coverage, or limited-scope dental or vision benefits.

Thus, effective for 2014, the tax exclusion provided through a cafeteria plan is only available when group coverage is purchased. Employers that want to contribute toward the cost of individual coverage must do so on a taxable basis.

The Notice provides a transition rule for certain cafeteria plans for plan years beginning before Jan. 1, 2014. For cafeteria plans that as of Sept. 13, 2013, operate on a plan year other than a calendar year, the restriction on purchasing individual Exchange coverage through a cafeteria plan will not apply before the first plan year that begins after Dec. 31, 2013. However, individuals may not claim a premium tax subsidy for any month in which they are covered by an individual plan purchased through an Exchange as a benefit under a cafeteria plan.

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Negotiating Medical Fees: How to Shop…… Before you Drop.

William Johnson, President and CEO

CIBC of Illinois, Inc.

www.CIBCINC.com

One of the best things we have gained in the digital age is consumer freedom. Researching and shopping globally has become a critical part of the buying process, and the online world is your complete marketplace. Almost everybody goes online to look up reviews about one product or another, and to shop around for the best prices…even if they intend to purchase in a brick and mortar business. We do our homework, and it is empowering to say the least.

So why do we walk into the doctor’s office, or get a procedure done in the hospital with no regard for what the charges are going to be?

We are all guilty as charged. We have the procedure, and then lose our mind when we get the billing and find that were charged $2400 for this and that. “I can’t believe this! I was only in the office for 20 minutes! All she did was give me one shot!”

Worse yet, people treat a bill from their provider like an edict from their pastor. It is what it is, so pay it…right? Not so fast.

First of all, consider this: According to Consumer Reports, 80% of all medical bills contain errors. Also consider that there is an estimated $500 billion spent in duplicate processing, bad coordination of benefits and fee schedules that are out of date (source: Bloomberg). Think about the fact that 1 in 4 Americans go into credit card debt for medical bills. Well, just like shopping online, you also have the power to shop for health care services.

How To Negotiate Medical Expenses

Here are a few tips on how to take the power back from providers.

First, you need to comparison shop. Use resources like the Healthcare Blue Book to find out what prices should be, and then make sure your providers charges are in line with what’s on the bill. Don’t try and shame the provider into reduced prices by telling them that Joe Doctor at the end of the hallway is cheaper, but do mention that their pricing seems to be a little out of line with usual and customary charges.  Get itemized estimates up front if you can. It’s easier to hide a 2000% profit margin in cotton swabs and gauze if it is listed as a single line item, so get the detail broken out.

Be sure to keep all of your explanation of benefits from your carrier, and all of your bills. As mentioned before, there is a LOT of billing errors, and frankly, providers love it when you pay for something the insurance company has already paid for. Think about it: When did a provider ever call you and offer a refund for overpayment?

Another good tactic is to speak to the billing office. Don’t expect a reduction of 50%, but getting 10% to 20% off a bill is better than the proverbial “stick in the eye.” Also, solicit a deeper discount for immediate payment. If you can pay for it on the spot, providers will trade margin for cash flow. Think about how many people DON’T pay their bill. Recent figures estimate that providers write off roughly 40% of all procedures due to default by carriers and patients.  Take advantage of this if you can…it works.

When your provider writes a script for you, ask for samples as much as possible. They have them, so why not give them to you?  You can also call the drug companies directly or go online and request coupons or reductions. Anything helps in these tough economic times.

Finally, insist on a manageable payment plan for what you can’t address immediately.  Consider that providers do absorb a great deal of bad debt, and due to this, they work really hard to get you to pay as much as possible as quickly as possible. They are quite, ahem, “persuasive” in their approach to this. If you can only afford $50 per month, then tell them that…but for goodness sake, keep to it. They will try and get you to agree to a much higher plan, and it is in their interest to do so. Keep in mind that their end game is to get paid for services, and without you paying the bill, that doesn’t happen. You are holding more cards than you realize in this game.

 We hope this helps. While we don’t think there will ever be online medical providers, we do think that the digital age has shifted a lot more resources in the consumer’s hands.

Now, if we could only get patients to start thinking of themselves as consumers!

This article is intended for informational purposes only and should not be construed as legal advice. Please consult with a legal professional for legal opinions.

 To get more information on CIBC of Illinois, visit us at www.CIBCINC.Com or call toll free 877-936-3580.

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