Overview

The Godfather trilogy is one of my favorite movie series. My mother was Italian American with both parents from the Old Country.  What is the connection between these Oscar winning films and Obamacare? Arguably there is no connection except for the fact that once you think that you have figured out the best thing to do for your clients or business with respect to healthcare, the federal government “pulls you back in” with more changes and updates. Sometimes a Plan B is not enough so that you need a Plan B for your Plan C.

I have written a few articles outlining possible solutions for small business owners in the wake of Obamacare and its rollout. My premise is that the small business owner inherited the responsibility of healthcare for employees as a mechanism to attract and retain employees in a competitive marketplace. Small business owners never wanted to be in the employee benefits business and instead inherited an albatross that is the second largest expense for most businesses.

The question is “Can a business provide or participate in the cost of health insurance without being held hostage every year to premium increases of 15-30 percent?” Even in the realm of self-funded health insurance with stop-loss provisions, a few big claims can easily break the bank.

Prior articles have noted the major cost differential between individual insurance and group insurance in favor of individual insurance. The concept of “affordable healthcare” in the Affordable Care Act aka Obamacare, is greatly enhanced by tax subsidies for individuals who meet the income requirements.

The combination of an employer sponsored medical expense reimbursement plan (MERP) and individual insurance purchased by employees with the benefit of tax subsidies can provide employees with equivalent coverage to what had previously been offered in the employer-sponsored group health plan at an equivalent cost to the employee but at a much lower cost to the employer. 

A major thrust of DOL Notice 2013-03 issued in September 2013 was limiting the ability of business owners and plan participants from enjoying the tax benefits of premium reimbursements under a health reimbursement account for employees who purchase individual coverage on the healthcare exchange with or without tax subsidies. Under the DOL Notice, excepted benefits include accident-only coverage, disability income, certain limited-scope dental and vision benefits, certain long-term care benefits, and certain health FSAs.

This article focuses on the use of one of the Excepted Benefits, Non-Coordinated Excepted Benefits, in conjunction with individual coverage purchased on the healthcare exchange using the benefits of tax subsidies as a more cost efficient method for small employers and their employees to purchase health insurance.

A Summary of the Problem of Integrating Individual Coverage with Obamacare

The federal government has been back pedaling on a number of different fronts related to Obamacare. DOL Notice 2013-03 sought to limit the ability for business owners to integrate health reimbursement accounts with individual insurance purchased on a healthcare exchange. The Notice was largely focused on the ability of an individual to “double dip” enjoying the benefit of premium cost reductions of tax subsidies along with the payment of premiums with pre-tax dollars and tax-free reimbursements from the employer. The other significant point was that HRAs are treated as group health plans under the regulations. The limited benefits of the HRA are in direct conflict with one of the major requirements of Obamacare – unlimited benefits.

In the process, the federal government realized that the same employees that the federal government was trying to benefit were disadvantaged by these limitations. The IRS, Employee Benefits Security Administration, and Health and Human Services Department, issued proposed regulations on December 24, 2013, that provided amendments to the Excepted Benefits under Obamacare Coverage – Reg. 143172-13. The proposed regulations provide a path towards using excepted benefits to supplement or integrated with qualifying coverage.

Excepted Benefits Under Obamacare

IRC Sec 9832 defines excepted benefits. The first category of excepted benefits include benefits that are traditionally not health coverage – automobile insurance, liability insurance, worker’s compensation, and accidental death and dismemberment coverage. These benefits are always “excepted” from the provisions of Obamacare.

The second category includes limited scope vision, dental, long-term care, nursing home health care or community based health care. Qualification as an “excepted benefit” in this category requires the benefits to be provided either (1) Under a separate policy or certificate or contract of insurance or (2) Not be an integral part of a group health plan whether the group plan is insured or self-insured.

The third category of excepted benefits which is the subject of this article is known as “non-coordinated excepted benefits. This category includes specified illness or illness coverage including hospital indemnity or other fixed indemnity coverage. These benefits must be provided under a separate plan or policy or certificate. The employer must not coordinate these benefits with the exclusion of benefits under the group plan offered by the Employer. The benefits must be paid without regard to the group plan offered by the Employer.

This third category provides ample flexibility in my opinion to create a MERP.  What is the benefit of the MERP in the first place? The MERP allows the employer to reimburse “unreimbursed” medical expenses for employees on a deductible basis. These reimbursements are non-taxable to employees and also not subject to FICA and FUTA withholding taxation.

The MERP when combined with individual coverage provides a combination of benefits that are equivalent to an existing group health plan at a cost that can be 40-70 percent less expensive than the cost of group health insurance for the employer. The ultimate cost savings are largely a function of the cost of individual coverage with or without tax subsidies and reimbursements under the MERP. One thing is for sure! The business owner will no longer be held hostage with the noose around his neck when it comes to budgeting and annual premium increases.

Designing the MERP to Reimburse Payments for Specified Illness and Hospital Indemnity

It would appear that the AFLAC duck successfully managed to have insurance contracts for specified illnesses treated as an excepted benefit for Obamacare. Long before the days of the AFLAC duck, AFLAC was very well known in Japan where it made a fortune selling cancer insurance. Since the days and the advent of the AFLAC duck, the company whose headquarters happens to be in Columbus, Georgia, the home of the infantry, the company has become a household name and done very well selling specified illness insurance and other coverage as voluntary benefits to employers.

In this case, the MERP can be created to provide benefits for specified illnesses, hospital indemnity or fixed indemnity for reimbursement to plan participants. In my view, the range of specified illness coverage can be quite expansive and liberal to cover a wide range of illnesses and treatments.

The coverage for a specified illness can be designed so that the MERP provides a level of benefit once an illness is diagnosed and treated. Benefit payments can be designed accordingly. If reimbursement were designed to parallel the benefits of commercial insurance coverage, the MERP might provide a lump sum payment of $1,000 for example, once an illness is diagnosed. Alternatively, the benefit payment might also be designed to provide a co-payment for a series of treatments up to an annual maximum.

The range of specified illnesses can identified within the plan document so that it captures all or most of the traditional illnesses that are prevalent in the United States by medical category – (1) Cardiovascular (2) Respiratory (3) Neurological (4) Gastrointestinal (4) Endocrine and Metabolic (5) Muscoloskeletal and Connective Tissue (6) Renal and Urological (7) Hematological (8) Reproductive (9) Psychiatric (10) Pediatric (11) Dermatological (12) Surgical Problems (13) Infectious Disease. Each of these categories can be further defined in the plan document to define the types of illnesses covered under each document. Once these illnesses are outlined, you most likely end up with the top 100 illnesses in most medical books.

Additionally, the MERP can provide hospital indemnity coverage which provides a fixed amount per day of hospitalization ($100-250 per day). Coverage under this type of MERP would be subject to an annual cap on benefits and perhaps a cap per type of benefit. The result is that the range and breadth of specified illness and indemnity coverage will provide a comprehensive assortment of coverage and benefits that will correspond to the types of illnesses covered under the group health plan or individual coverage purchased on the exchanged. Similarly, fixed indemnity payments for certain medical treatments or procedures will correspond to the payment of co-payments, deductibles and co-insurance under most traditional insurance plans.

The net result is the combination of low cost individual coverage. The limitations of bronze level coverage with respect to reduced provider networks and higher deductibles is offset through benefit reimbursement through the MERP and lower cost individual coverage. 

Summary

All roads lead to Rome unless of course you are not going to Rome. The goal here is to dramatically the cost of coverage from the perspective of the employer while providing equivalent medical benefits to employees at the same or lower cost from the employee perspective. The path towards providing these benefits consists of being able to integrate individual coverage with or without tax subsidies while falling within the provisions of the DOL Notice 2013-03 and proposed regulations. 

Regardless of your political persuasion, you can’t ignore the powerful effect of tax subsidies for employees that qualify. MERP benefits will keep employees in an equivalent position from a benefits perspective. I submit to you that your client’s use of tax subsidies will not be the financial demise of our great nation. Far greater financial sins have been committed elsewhere. The jobs in this economy are primarily with small businesses. The strategy outlined above is one to reduce costs and allow the business owner to reinvest in his own business.

On a happier note, remember to count your blessings today!