The IRS has posted on its website a “Question and Answer” that effectively prohibits employers from reimbursing employees for premiums for individual health insurance polices purchased on a State exchange or otherwise.

The IRS’ reasoning is that such reimbursement arrangements, often referred to as “employer payment plans” are “group health plans.” All group health plans must meet the Affordable Care Act’s “market reform” requirements, such as the prohibition on annual dollar limits, and the requirement to provide preventive care services without cost sharing. Under guidance issued in 2013 (Notice 2013-54), the employer’s “group health plan” may not be integrated with an individual insurance policy in order to meet the market reform requirements. Therefore, although the individual policy would likely reflect the market reform requirements, the employer’s simple reimbursement plan would not, and the employer’s plan would violate several provisions of the Affordable Care Act.

The guidance does not apply to stand alone “retiree-only” plans.

The guidance raises many questions. In general, it jeopardizes many employers’ strategies to abandon their comprehensive group health coverage and, instead, reimburse employees for individual coverage.

The 2013 guidance provides that after-tax withholding from payroll to pay insurance premiums at the direction of an employee will not, under certain circumstances, be characterized as a “group health plan” and therefore would not be subject to the market reform provisions of the Affordable Care Act.