Broker and Employer ALERT
Employers utilizing HRAs to purchase individual policies for their
employees may be violating Federal law
CONTRIBUTING TO OR REIMBURSING EMPLOYEES FOR INDIVIDUAL POLICIES THROUGH AN HRA
MAY CAUSE THE INDIVIDUAL POLICY TO BE VIEWED AS PART OF A GROUP HEALTH PLAN
SUBJECT TO THE REQUIREMENTS FOUND IN ERISA, COBRA, HIPAA AND OTHER FEDERAL
Colorado Insurance Regulation 4-6-8 has generally prohibited the sale of individual health insurance policies to small
employers except under very specific and restrictive circumstances. Under DOI Bulletin B-4.32 (prior to its withdrawal
in December 2010), small employers were effectively prohibited from paying for any portion of the employee’s
premium for an individual policy through a Health Reimbursement Arrangement (HRA) because such individual
policies were required to be compliant with Colorado’s small group insurance requirements.
As a result of DOI Order Number 0-11-064, issued November 16, 2010, (resulting in the withdrawal of Bulletin B-4.32) and the recent passage of Senate Bill 11-19, there is quite a bit of confusion regarding the rules and regulations surrounding small employers offering individual coverage to their employees. SB 11-19 allows employers in Colorado to utilize HRAs to fund individual health insurance plans for their employees (unless the employer had a small group insured health plan in effect during any portion of the prior 12 months). Unfortunately, there are additional Federal and State laws and regulations that should be considered by employers before taking action under the November 2011 DOI Order as well as SB 11-19.
Since no individual insurance policy in Colorado is required to comply with Federal laws mandating coverage for group health plans (such as ERISA  and HIPAA ), with the possible exception of CoverColorado, the employer may be creating unexpected liability for themselves. The underlying concern is that the combination of the HRA and individual policies funded by the HRA may be considered together as a group health plan for certain Federal law purposes. Under these circumstances an employer may be liable for medical costs for benefits that an individual policy does not pay for that are mandated under and covered by Federal laws concerning a group plan. In addition, an applicant may be declined enrollment in CoverColorado when an HRA replaces a group health plan. Unfortunately, the narrow focus of SB 11-19 fails to acknowledge the numerous issues of employer compliance and liability that still exist after opening the possibility of funding individual insurance policies of employees through an employer-sponsored HRA.
Why Individual Policies May Form a Group Health Plan When the final HIPAA regulations on special enrollment and other portability requirements were published in 2004, the preamble introducing those regulations specifically stated: “If an employer provides coverage to its employees through two or more individual policies, the coverage may be considered coverage offered in connection with a group health plan and, therefore, subject to the group market provisions under HIPAA.” [69 Fed. Reg. 78719, 78733 (Dec. 30, 2004)(emphasis added).] The HIPAA preamble went on to state that whether an arrangement is a “group health plan” for HIPAA purposes depends on the particular facts and circumstances. Significant considerations include:
• Whether the employer makes contributions to health insurance premiums;
• The policy that provides the coverage does not have to be considered a ‘‘group’’ policy under State law;
• The employer need not be a party to the insurance policy.
 Employee Retirement Income Security Act of 1974, as amended
 HealthInsurance Portability and Accountability Act of 1996, as amended
Similarly, ERISA regulations provide a safe harbor rule under which a “group-type insurance program” will not be considered subject to ERISA, provided an employer’s involvement is carefully limited so that the employer:
• DOES NOT make employer contributions towards insurance premiums
• DOES NOT become involved in any employee decisions
• DOES NOT restrict insurance or carrier choices
• DOES NOT communicate that the policies are employer provided or part of an employer benefit
• DOES NOT assist with any negotiations with insurers
• DOES NOT execute any policy documents on behalf of your employees
• DOES NOT answer any questions regarding the policy
• DOES NOT maintain any claim forms, documents or copies of policies
• DOES NOT assist with claims disputes, claims submissions or any other claims issues
[DOL Reg. 2510.3-1(j)]
These concerns suggest that individual health insurance policies purchased with funds from an employer’s HRA may be subject to a variety of Federal laws that are not bound by State law characterization of benefit plans as “group” or “individual.” Employers considering such arrangements need to be aware of the potential violations such a program may face under Federal laws containing group health plan mandates.
Federal HIPAA Rules HIPAA applies to any employer sponsored health plan covering two or more current employees. If the individually billed premium plan is viewed as employer sponsored under HIPAA, those policies will most likely not meet HIPAA’s health status nondiscrimination rules.
Discrimination Based on Health Status: Among other things, HIPAA prohibits a group health plan from
discriminating with regard to eligibility, premiums or contributions based on specific health status related factors.
Because individual health insurance is not guarantee issue, many employees may be declined coverage based
on their health status. On average, 30% of all applicants are declined for coverage. In addition, individual
premiums can vary based on the health condition of the applicants. As a result, many applicants who are in fact
approved for coverage may end up paying more than someone who is healthy.
Medical Underwriting: HIPAA prohibits the use of medical underwriting for determining eligibility or individual
premiums within a group. In addition to the above, HIPAA requires that in small groups of 2-50 employees, the coverage must conform to specific parameters (several of which apply to large groups as well) including:
• Guarantee issue
• Limitations on pre-existing conditions
• Specific exclusion of pregnancy as a pre-existing condition
• Continuing coverage guarantees related to prior creditable coverage, including conversion coverage following
the expiration of COBRA
• Limitations on premium ratings due to such factors as medical and claims history
• Mental health parity provisions
• Provisions of the Women’s Health and Cancer Rights Act; Newborns and Mother’s Rights Act
None of these parameters apply to individual plans, and thus such requirements could create liability for
employers who fund individual plans.
See HCFA Insurance Standards Bulletin 00-06 (Nov. 2000) for more information on when an individual health
insurance policy may be subject to HIPAA’s requirements.
HRAs sponsored by employers meeting the 20 employee criteria for application of COBRA are subject to COBRA continuation coverage requirements. In addition to sorting out how COBRA applies to HRAs in general, to the extent individual policies offered under an HRA are considered as part of the group health plan, those policies would also be potentially subject to COBRA’s continuation rights.
Discrimination Testing under PPACA Under the Federal health care reform legislation (the Patient Protection and Accountable Care Act, or PPACA), all employers offering an insured group health plan are subject to discrimination testing unless they have maintained a “grandfathered” plan. It is unlikely that a plan that does not provide guarantee issue of coverage and uniform benefits for all employees, such as the case may be with separately issued individual policies, will pass the discrimination testing guidelines. W-2 Reporting under PPACA PPACA requires that beginning in 2012 (2013 for small employers) employers report the value of employer sponsored health plans on the employees W-2 form. Because the plans funded through an HRA may be considered employer sponsored plans, the values for individual policy coverage would have to be determined and reported for each employee.
Employee Notification Requirements
Federal laws such as ERISA, HIPAA and COBRA require employers to ensure that numerous notices are
provided to participants of an employer sponsored group health benefit plan. There are substantial penalties for non-compliance.
Potential Employer Liability Related to Mandated Benefits As an employer sponsored group plan, many Federal mandates for group health insurance benefits may be required for each individual policy purchased through the employers HRA. Typically, individual policies do not cover the following Federally mandated benefits, to name a few:
• Newborn & Mothers Health Protection Act
• Mental Health Parity & Addition Equity Act
• Women’s Health and Cancer Rights Act
Employers may have liability to provide mandated benefits that are not covered under the individual medical
policy purchased by the employees through the employer sponsored HRA. Potential Employer Fines and Penalties-Federal The Department of Labor, the IRS, and the Department of Health and Human Services are involved in the regulation of health benefit plans. If an employer is found to be in violation of certain ERISA or other requirements within the jurisdiction of these agencies, the penalties and fines can be substantial. As an example; failure to provide certain employee notifications can result in a fine of $110 per employee, per day.
Under certain conditions, Colorado law provides that individuals who are declined for individual health insurance may apply to Cover Colorado, a high risk pool formed in response to the federal HIPAA law). Colorado Revised Statutes Section 10-8-513 (2)(f) states that individuals shall not be eligible for coverage under the CoverColorado program if the employer “payer” is “financially benefiting” from the coverage of an individual in CoverColorado. As a result of this limitation and SB 11-19, the current CoverColorado application asks, “If your employer does not currently offer group health insurance, did your employer terminate the group health insurance plan within the past 12 months?” If CoverColorado determines that the employer terminated their group health insurance plan within the past 12 months (of the application to CoverColorado), the application for individual coverage will be declined unless the individual qualifies as “HIPAA eligible” (that is, they can prove 18 months of credible coverage under a Federal group health
plan and meet certain other criteria). Employers need to be very careful they are not placing their employees in a position of being denied coverage under the last resort program offered by CoverColorado when terminating a small group health plan and replacing it with a HRA used to fund individual insurance policies.
There are a number of questions beyond the scope of this Alert regarding the viability of SB 11-19’s apparent attempt to make room for a HRA design for small employers in Colorado while protecting the integrity of CoverColorado.
Regardless of the outcome of those issues, employers and their brokers need to be cognizant of the risks involved with HRA designs and protect against them in a prudent manner.
Absent additional guidance from the various Federal agencies charged with enforcing HIPAA, ERISA, COBRA and
other laws governing the health benefits provided to employees, an employer would appear to be assuming potentially
significant risk in adopting HRAs for the purpose of funding their employees’ purchase of individual health insurance
policies. Despite the purported benefits of this approach, the fact that those vendors willing to administer the program
will inevitably not protect the employer from the liabilities outlined above (in fact, in at least one case, employers are
required to indemnify the HRA administrator against any such liabilities), should indicate that employers need to be
extremely cautious about establishing such plans. Brokers are well advised to ensure that their clients are made
aware of these matters insofar as employers will often expect to be alerted to such risks by their trusted advisors.
Brokers should also recommend their clients seek legal counsel with any questions concerning the above.
This Alert is for general information only. It should not be construed as, and does not constitute, legal
advice on any specific matter, nor does this Alert create an attorney-client relationship.