Can an employer offer an Individual Plan to a couple of employees
and everyone else take the Group Plan?

Health Care Reform requires that coverage must be under a GROUP health plan, not employer reimbursements for individual plans.  Learn More⇒  IRS Notice 2013-54  ♦ Our webpage on §106 Employer deductibility of health insurance premiums

IRS said that employer payment plans — in which employers reimburse employees for premiums — are “considered to be group health plans.” Such plans are insufficient under the ACA because they do not meet the law’s provisions prohibiting insurers from capping benefits and requiring that they provide certain preventive services without co-payments.

Loss of Section §106 and MAJOR penalties irs.gov  if employer reimburses costs of Individual Medical Coverage.    There are also Penalites if employers shift employees to the exchange (Covered CA)  as reported in california health line.org on  5.27.2014

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for the latest and specific information for your situation.

Pre – Health Care Reform Research

Blue Cross Individual Application – PROHIBITS Employer payment (contribution, reimbursement) of premium! (Section 7 # 9)

Check out the Corel Word Perfect or .pdf version!

  1. General Information:
    1. Employer group health insurance is issued on a guaranteed basis to California Employer Groups of 1 to 50 employees. (AB 1672 – 1083 Insurance Code ‘ 10700 et. Seq.)Qualificationis activated by the number of employees and:
      1.  if any portion of the employees premium is paid by the employer (‘ 10702  CA ACA §10753.02)
      2. ‘ 10702 b
        1. The health benefit plan is treated by the small employer or any of the covered individuals as part of a plan or program for the purposes of Section 106 or 162 of the Internal Revenue Code.
          1. Blue Cross, circa 1992 when AB 1672 passed, along with other Insurance Companies & HMO’s did a major mailing to all of their “list billed” individual policies clients to make sure that those groups are being made aware of the fact that if they qualify for group they have to be rolled over to group coverage
    2. IRC Section ‘ 105 e 1 – A Group Health Plan to be tax deductible for the employer and tax free to the employee must be for Employees
      1. IRC Section ‘ 106 Business Expenses Publication 535   Employer’s Tax Guide to Fringe Benefits Publication 15-B
        1. If you give the employee cash for opting out of the Group Plan – it becomes taxable income and all employees lose the deduction (sgilaw.com)
      2. To qualify as an accident and health plan, payments under which are excludable from gross income in computing federal income tax liability, a “plan” must benefit all employees or some identifiable class of employees; a plan can  be for as few as one employee but there must be some rational basis other than ownership of the corporation to discriminate among employees. American Foundry v. C. I. R., C.A.9 1976, 536 F.2d 289. Internal Revenue 3161
        1. It can even be an Individual Policy Rev Ruling 61-146, BUT, this would ONLY apply where there is only ONE employee, thus not coming under AB 1672 or 1083.
  2. NO – It= s not Allowed
    1. Sec. 1182 (a) (1) ERISA . – a group health plan…may notestablish rules for eligibility …ofanyindividual to enroll under the terms of the plan based on … health status-related factors
      1. An Individual Plan has prohibited factors – CA DOI Underwriting Survey
    2. Sec. 1182(b) (1) … A group health plan,…may not require any individual …to pay a premium or contribution which is greater than such premium or contribution for a similarly situated individuals see also AB 1672 Cornell Law
        1. An Individual Plan has different rates – often lower as the employee would have to qualify medically to get it – a written application
          1. So, employees who can= t qualify for an Individual Plan will have a MAJOR problem, especially if there isn= t a group plan in place.
      1. Distinctions among groups of similarly situated participants in a health plan must be based on bona-fide employment-based classifications consistent with the employer’s usual business practice. (See also Management Carve Outs)
        1. Distinctions cannot be based on any of the health factors noted earlier.
        2. For example, part-time and full-time employees, employees working in different geographic locations, and employees with different dates of hire or lengths of service can be treated as distinct groups of similarly situated individuals, with different eligibility provisions, different benefit restrictions, or different costs, provided the distinction is consistent with the employer’s usual business practice.
        3. In addition, a plan generally may treat participants and beneficiaries as two separate groups of similarly situated participants.
          1. The plan also may distinguish between beneficiaries based on, for example, their relationship to the plan participant (such as spouse or dependent child) or based on the age or student status of dependent children.
        4. In any case, a plan cannot create or modify a classification directed at individual participants or beneficiaries based on one or more of the health factors. dol.gov/ Findlaw CA DOI Health Underwriting Survey Management Carve Outs
    3. AB 1672 – 1083 CA Insurance Code ‘ 10706 requires participation requirements
      1. So, if you have employees on Individual Plans – it may create problems.
    4. ‘ 10705 f – can’t exclude an otherwise eligible employee.
      1. Thus all similarly situated employees are entitled to the same coverage and premiums
    5. Mr. MIP (Guaranteed Issue before ACA) – Insurance Code 12725.5 prohibits doing it with them.

Section §106 is the biggest break there is in the Tax Code, even more than Mortgage Interest.

Related Pages in the Management Carve Out Section

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