Employer contributions are the same for everyone (e.g., $200 per month for each employee). On the face, this is a nondiscriminatory design. But when employees buy their individual policies (underwritten on a per-person basis), the premium may be higher for unhealthy employees than for their healthy colleagues–this has a discriminatory impact. For example, a healthy employee may be able to buy insurance for $200 per month, while a sick employee may have to pay $300 per month for the same coverage.
In addition, if individual insurability issues (i.e., poor health) prevent some employees from obtaining outside health coverage at all, there may be a HIPAA violation (HIPAA prohibits medical underwriting for eligibility or individual premiums). Treasury officials have informally commented that such arrangements may violate HIPAA.*
* Comments of Bill Bortz, Associate Benefits Tax Counsel, U.S. Dept, of Treasury, DC Bar Association Meeting, February 6, 2002.
Because of the above HIPAA concerns, until the regulators issue guidance saying that the HIPAA nondiscrimination rules do not apply to HRA’s that are used solely to pay for individual policies for major medical coverage, we recommend against establishing an HRA that is to be used solely for such a premium reimbursement purpose. *
* However, if an HRA is designed to reimburse both out-of-pocket medical expenses and individual policy health insurance premiums (not solely health insurance premiums), it seems less likely that such design would violate HIPAA’s nondiscrimination rules because all HRA participants can at least use the HRA to receive a nondiscriminatory level of reimbursement for their out-of-pocket medical expenses.
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