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New Bill Would Permit Defined Contribution for Individual Health Plans

Some people dabble in health insurance. Others specialize. Those who dabble may sell it as a courtesy to

their clients, but they spend most of their time selling other products. In contrast, brokers who focus on

selling health insurance are constantly looking for ways to find more prospects and do more business.

Unfortunately, with the uninsured rate continuing to drop, that’s becoming more and more difficult. If

nearly everyone who wants and can afford health insurance already has it, it’s hard to generate new

qualified leads.

 

That’s especially true between open enrollment periods, when most people can’t buy health insurance

even if they wanted it. Enrollment between February and November is restricted to those who qualify

for a special enrollment period, so the trick is to find people who 1) are uninsured, 2) want health

insurance, 3) can afford it, and 4) are eligible to enroll. Easier said than done.

 

A new bill, though, might help brokers identify individuals who meet all of these criteria, not just one at

a time but in groups. The bipartisan bill, which was introduced simultaneously in the House and the

Senate, would permit small employers that are not subject to the Affordable Care Act’s employer

mandate to drop their group health coverage, put money in a Health Reimbursement Arrangement

(HRA) instead, and let the employees use those funds to purchase health insurance in the individual

market. Though it’s not completely clear, the bill would likely create a 60-day special enrollment period

for employees who are losing their group coverage, which would provide brokers who help employers

set up these arrangements with multiple individual leads: people who are suddenly uninsured, need to

sign up for health coverage, have some employer money to help them pay for it, and have a special

enrollment right through the marketplace.

 

Defined Contribution: what the law says

Often referred to as defined contribution, this strategy – where an employer contributes money to a tax-

free account that employees can then use for qualified 213(d) medical expenses, including individual

health insurance premiums – has been debated for years. Because regulators hadn’t specifically said

that it wasn’t legal, some people thought it was while other people thought it wasn’t. Clearly, we

needed some guidance.

 

We’ve received some clarification over the past couple years. In fact, the Department of Labor, Treasury

Department, and Department of Health and Human Services (collectively referred to as “the

Departments”) have chimed in five times on this controversial issue. Here’s a short summary of their

position:

 

  • HRAs and other tax-advantaged accounts are group health plans under the law and therefore

are subject to all of the rules and regulations applicable to group health plans, including the

requirements that these plans cover up-front preventive care and do not place an annual dollar

limit on essential health benefits.

  • Because these plans do not cover preventive care, they fail to comply with that market reform.

And because they are limited to the amount the employer contributes, they do place a dollar

limit on essential benefits. In other words, they’re out of compliance with insurance regulations.

  • The penalty for offering a plan that is out of compliance is a whopping $100 per day per

employee, or $36,500 per year, so this can be a very costly strategy for employers.

  • The IRS offered companies that were already reimbursing employees for the cost of individual

coverage a short transition period but has promised to start enforcing the penalties effective

July 1st, 2015.

 

New Bill Gaining Traction

Just before the deadline, though, on June 25th, “U.S. Senators Chuck Grassley (R-IA) and Heidi Heitkamp

(D-ND) and Congressmen Charles W. Boustany, Jr., MD, (R-LA) and Mike Thompson (D-CA) introduced

bipartisan companion language in the House (H.R. 2911) and Senate (S. 1697) known as the Small

Business Healthcare Relief Act to roll back existing Treasury Department guidance issued under the

authority of the Affordable Care Act prohibiting the use of Health Reimbursement Arrangements

(HRAs).” Read the press release here: http://www.grassley.senate.gov/news/news-releases/grassley-

heitkamp-boustany-and-thompson-introduce-health-reimbursement.

 

The Small Business Healthcare Relief Act, according to the press release, would “restore flexibility and

choice into the marketplace by:

  • Ensuring that small businesses and local municipalities with fewer than 50 employees are

allowed to continue using pre-tax dollars to give employees a defined contribution for

healthcare expenses

  • Allowing employees to use HRA funds to purchase health coverage on the individual market, as

well as for qualified out-of-pocket medical expenses if the employee has qualified health

coverage

  • Protecting employers from being financially penalized for providing this cost-sharing option to

employees”

 

The legislation would only apply to companies with 50 or fewer full-time equivalent employees that are

not applicable large employers subject to the employer mandate. It would also prohibit employees with

access to these employer funds from double-dipping and also applying for a premium tax credit.

 

In addition to the bipartisan backing in both chambers, this bill has a surprising amount of support from

several high-profile organizations, including the U.S. Chamber of Commerce, the National Association for

Towns and Townships, the American Farm Bureau Federation (AFBF), the National Association of

Manufacturers (NAM), the National Association of Home Builders (NAHB), the National Federation of

Independent Business (NFIB), the Small Business Majority, the National Association for the Self

Employed (NASE), the Coalition for Affordable Health Coverage (CAHC), the Retail Industry Leaders

Association (RILA), and the National Retail Federation (NRF). Many of these organizations are quoted in

the press release, saying this bill is a “common-sense solution” that would give small employers “the

flexibility they need to offer health care benefits in a way that makes the most sense for their employees

and their businesses.”

 

What does this mean to you?

A bill is just a bill. Until it’s passed, it doesn’t change the way we do business. Right now, the rules say

employers cannot pay for individual health plans through an HRA or any other funding arrangement,

and that’s how agents should advise their clients. That said, the Affordable Care Act is continually

evolving, and brokers who want to be successful in this business need to keep an eye on the proposed

changes to the health reform legislation and make sure they’re prepared in case some of the proposals

do end up becoming law. AHCP will continue to keep brokers abreast of any developments that will

present more sales opportunities.

 

This bill has a lot of support, and while it would have the effect of causing some companies to drop their

group health coverage, it would also encourage other small employers who don’t currently have a group

health plan to put some money toward their employees’ individual premiums. It’s the sort of proposal

that could attract supporters from both sides of the aisle; in fact, it already has. With identical bills in the

House and the Senate, the proposed legislation has a greater chance of passing, and with all of the

support out there, it’s something the President might consider signing.

 

With that in mind, brokers who don’t currently sell individual health insurance may want to go ahead

and get registered to sell through the marketplace. If the bill doesn’t pass, there’s no harm in being

registered; there are still plenty of people who need your help. On the other hand, if the bill does pass, a

lot of people who previously had coverage through their employer will suddenly be shopping for

individual policies, and you don’t want to miss out on that opportunity.

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