(Photo courtesy of www.curtisleephotography.com)
Question: Can I pay for my employee’s individual health insurance plan outside of our normal group coverage?
Answer: No, this practice is prohibited by federal law, though it is has been a very common question asked recently. While an employer may find very valid and rational reasons for giving an employee a stipend to cover outside insurance premiums, there are several reasons this practice is not allowed by law and is also not good business.
If an employer pays for an individual health insurance plan, it is basically endorsing that individual plan as part of its group offering. In many cases, this would put your group plan out of ERISA (Employee Retirement Income Security Act) compliance and could disqualify the tax-advantaged status of your group health plan.
Secondly, this creates “adverse selection” as it relates to risk to the group insurer. Putting it simply, no carrier wants to insure a plan where all of the young, healthy, low-risk employees opt out for the “better deal” of a lower cost individual health plan that is fully or partially subsidized by the employer. If this were allowed, an organization would just see its group premiums increase to even higher levels.
Finally, it’s disadvantageous to both parties from a taxation standpoint. Any funds paid to the employee under this type of arrangement would be taxable at the state and Federal level, as opposed to group insurance premiums that are typically routed through an HRA (Health Reimbursement Account), making them tax free contributions for both the employee and the employer.
If you have any further questions, please contact: Curtis Farmer, Cascade’s Director of Group Benefit Programs