FAQS ABOUT AFFORDABLE CARE ACT 
IMPLEMENTATION (PART XXII)  
 
November 6, 2014 
 
Set out below are additional Frequently Asked Questions (FAQs) regarding implementation of 
the Affordable Care Act. These FAQs have been prepared jointly by the Departments of Labor 
(DOL), Health and Human Services (HHS), and the Treasury (collectively, the Departments). 
Like previously issued FAQs (available at http://www.dol.gov/ebsa/healthreform/ and 
http://www.cms.gov/cciio/resources/fact-sheets-and-faqs/index.html), these FAQs answer 
questions from stakeholders to help people understand the new law and benefit from it, as 
intended. 
 
Compliance of Premium Reimbursement Arrangements 
 
On September 13, 2013, DOL and the Treasury published guidance on the application of the 
market reforms and other provisions of the Affordable Care Act to health reimbursement 
arrangements (HRAs), certain health flexible spending arrangements (health FSAs) and certain 
other employer health care arrangements.1  HHS issued contemporaneous guidance to reflect that 
HHS concurs in the application of the laws under its jurisdiction as set forth in the DOL and 
Treasury Department guidance.2  Subsequently, on May 13, 2014, two FAQs were made 
available on the IRS website addressing employer health care arrangements.3   
 
The Departments prior guidance explains that employer health care arrangements, such as 
HRAs and employer payment plans, are group health plans that typically consist of a promise by 
an employer4 to reimburse medical expenses up to a certain amount.  The Departments guidance 
clarifies that such arrangements are subject to the group market reform provisions of the 
Affordable Care Act, including the prohibition on annual limits under Public Health Service Act 
(PHS Act) section 2711 and the requirement to provide certain preventive services without cost 
sharing under PHS Act section 2713.5  The Departments guidance further clarifies that such 
                                                             
1 See DOL Technical Release 2013-03, available at http://www.dol.gov/ebsa/newsroom/tr13-03.html, and IRS 
Notice 2013-54, available at http://www.irs.gov/pub/irs-drop/n-13-54.pdf. 
2 See Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare 
Arrangements, September 16, 2013, available at https://www.cms.gov/CCIIO/Resources/Regulations-and-
Guidance/Downloads/cms-hra-notice-9-16-2013.pdf. 
3 Available at: www.irs.gov/uac/Newsroom/Employer-Health-Care-Arrangements. 
4 These arrangements may be sponsored by an employer, an employee organization, or both.  For simplicity, this 
section of the FAQs refers to employers.  However, this guidance is equally applicable to HRAs sponsored by 
employee organizations, or jointly by employers and employee organizations. 
5 Section 1001 of the Affordable Care Act added new PHS Act  2711-2719. Section 1563 of the Affordable Care 
Act (as amended by Affordable Care Act  10107(b)) added Code  9815(a) and ERISA  715(a) to incorporate the 
provisions of part A of title XXVII of the PHS Act into the Code and ERISA, and to make them applicable to group 
health plans and health insurance issuers providing health insurance coverage in connection with group health plans. 
The PHS Act sections incorporated by these references are sections 2701 through 2728. Accordingly, these 
 
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employer health care arrangements will not violate these market reform provisions when 
integrated with a group health plan that complies with such provisions.  However, an employer 
health care arrangement cannot be integrated with individual market policies to satisfy the 
market reforms.  Consequently, such an arrangement may be subject to penalties, including 
excise taxes under section 4980D of the Internal Revenue Code (Code). 
 
Q1: My employer offers employees cash to reimburse the purchase of an individual market 
policy.  Does this arrangement comply with the market reforms? 
 
No.  If the employer uses an arrangement that provides cash reimbursement for the purchase of 
an individual market policy, the employers payment arrangement is part of a plan, fund, or other 
arrangement established or maintained for the purpose of providing medical care to employees, 
without regard to whether the employer treats the money as pre-tax or post-tax to the employee.  
Therefore, the arrangement is group health plan coverage within the meaning of Code section 
9832(a), Employee Retirement Income Security Act (ERISA) section 733(a) and PHS Act 
section 2791(a), and is subject to the market reform provisions of the Affordable Care Act 
applicable to group health plans.  Such employer health care arrangements cannot be integrated 
with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act 
sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes 
under section 4980D of the Code.  Under the Departments prior published guidance, the cash 
arrangement fails to comply with the market reforms because the cash payment cannot be 
integrated with an individual market policy.6   
 
Q2: My employer offers employees with high claims risk a choice between enrollment in its 
standard group health plan or cash.  Does this comply with the market reforms? 
 
No.  PHS Act section 2705,7 which was incorporated by reference into ERISA section 715 and 
Code section 9815, as well as the nondiscrimination provisions of ERISA section 702 and Code 
section 9802 originally added by the Health Insurance Portability and Accountability Act 
(HIPAA), prohibit discrimination based on one or more health factors.  Offering, only to 
employees with a high claims risk, a choice between enrollment in the standard group health plan 
or cash, constitutes such discrimination. While the Departments regulations implementing this 
provision8 permit more favorable rules for eligibility or reduced premiums or contributions based 
on an adverse health factor (sometimes referred to as benign discrimination), in the Departments 
view, cash-or-coverage arrangements offered only to employees with a high claims risk are not 
                                                                                                                                                                                                    
referenced PHS Act sections (i.e., the market reforms) are subject to shared interpretive jurisdiction by the 
Departments. 
6 See DOL Technical Release 2013-03, available at http://www.dol.gov/ebsa/newsroom/tr13-03.html, and IRS 
Notice 2013-54, available at http://www.irs.gov/pub/irs-drop/n-13-54.pdf.  See also Insurance Standards Bulletin, 
Application of Affordable Care Act Provisions to Certain Healthcare Arrangements, September 16, 2013, available 
at https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/cms-hra-notice-9-16-2013.pdf. 
7 Prior to the enactment of the Affordable Care Act, Titles I and IV of the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA), Public Law 104-191, added section 9802 of the Code, section 702 of ERISA, 
and section 2702 of the PHS Act (HIPAA nondiscrimination and wellness provisions). Affordable Care Act section 
1201 also moved those provisions in the PHS Act from section 2702 to section 2705. 
8 26 CFR 54.9802-1 (g); 29 CFR 2590.702(g);146.121(g). 
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permissible benign discrimination.  Accordingly, such arrangements will violate the 
nondiscrimination provisions, regardless of whether (1) the cash payment is treated by the 
employer as pre-tax or post-tax to the employee, (2) the employer is involved in the selection or 
purchase of any individual market product, or (3) the employee obtains any individual health 
insurance. 
 
Such offers fail to qualify as benign discrimination for two reasons.  First, if an employer offers a 
choice of additional cash or enrollment in the employers plan to a high-claims-risk employee, 
the opt-out offer does not reduce the amount charged to the employee with the adverse health 
factor.  Rather, the employers offer of cash to a high-claims-risk employee who opts out of the 
employers plan effectively increases the premium or contribution the employers plan requires 
the employee to pay for coverage under the plan because, unlike other similarly situated 
individuals, the high-claims-risk employee must accept the cost of forgoing the cash in order to 
elect plan coverage.  For example, if the employers group health plan requires all employees to 
pay $2,500 toward the cost of employee-only coverage under the plan, but the employer offers a 
high-claims-risk employee $10,000 in additional compensation if the employee declines the 
coverage, for purposes of discrimination analysis, the effective required contribution by that 
high-claims-risk employee for plan coverage is $12,500  that is, the $2,500 required employee 
contribution for employee-only coverage under the employers plan plus the $10,000 of 
additional compensation that the employee would forgo by enrolling in the plan.  Because a 
high-claims-risk employee must effectively contribute more to participate in the group health 
plan, the arrangement violates the rule that a group health plan may not on the basis of a health 
factor require any individual (as a condition of enrollment) to pay a premium or contribution 
which is greater than the premium or contribution for a similarly situated individual enrolled in 
the plan. 
 
Second, the Departments regulations generally permit providing, based on an adverse health 
factor, enhancements to eligibility for coverage under the plan itself but not cash as an alternative 
to the plan.  In particular, the regulations permit providing plan eligibility criteria that offer 
extended coverage within the plan and subsidization of the cost of coverage within the plan 
based on an adverse health factor.9  An example in the Departments regulations illustrates that a 
plan may have an eligibility provision that provides coverage to disabled dependent children 
beyond the age at which non-disabled dependent children become ineligible for coverage.10  
Another example in the regulations illustrates that a plan may provide coverage free of charge to 
disabled employees, while other employees pay a participant contribution towards coverage.11  
However, in the Departments view, providing cash as an alternative to health coverage for 
individuals with adverse health factors is an eligibility rule that discourages participation in the 
group health plan.  This type of arrangement differentiates based on a health factor and is outside 
the scope of the Departments regulations on benign discrimination, which permit only 
discrimination that helps individuals with adverse health factors to participate in the health 
coverage being offered to other plan participants.  The Departments intend to initiate rulemaking 
in the near future to clarify the scope of the benign discrimination provisions. 
                                                             
9 26 CFR 54.9802-1 (g)(1)(i); 29 CFR 2590.702(g)(1)(i);146.121(g)(1)(i). 
10 26 CFR 54.9802-1 (g)(1)(ii), Example 1; 29 CFR 2590.702(g)(1)(ii), Example 1;146.121(g)(1)(ii), Example 1.  
11 26 CFR 54.9802-1 (g)(2)(ii), Example; 29 CFR 2590.702(g)(2)(ii), Example;146.121(g)(2)(ii), Example. 
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Finally, because the choice between taxable cash and a tax-favored qualified benefit (the election 
of coverage under the group health plan) is required to be a Code section 125 cafeteria plan, 
imposing an effective additional cost to elect coverage under the group health plan could, 
depending on the facts and circumstances, also result in discrimination in favor of highly 
compensated individuals in violation of the Code section 125 cafeteria plan nondiscrimination 
rules.  
 
Q3:  A vendor markets a product to employers claiming that employers can cancel their 
group policies, set up a Code section 105 reimbursement plan that works with health 
insurance brokers or agents to help employees select individual insurance policies, and 
allow eligible employees to access the premium tax credits for Marketplace coverage.  Is 
this permissible? 
 
No.  The Departments have been informed that some vendors are marketing such products.  
However, these arrangements are problematic for several reasons.  First, the arrangements 
described in this Q3 are themselves group health plans and, therefore, employees participating in 
such arrangements are ineligible for premium tax credits (or cost-sharing reductions) for 
Marketplace coverage.  The mere fact that the employer does not get involved with an 
employees individual selection or purchase of an individual health insurance policy does not 
prevent the arrangement from being a group health plan.  DOL guidance indicates that the 
existence of a group health plan is based on many facts and circumstances, including the 
employers involvement in the overall scheme and the absence of an unfettered right by the 
employee to receive the employer contributions in cash.12   
 
Second, as explained in DOL Technical Release 2013-03, IRS Notice 2013-54, and the two IRS 
FAQs addressing employer health care arrangements referenced earlier, such arrangements are 
subject to the market reform provisions of the Affordable Care Act, including the PHS Act 
section 2711 prohibition on annual limits and the PHS Act 2713 requirement to provide certain 
preventive services without cost sharing.  Such employer health care arrangements cannot be 
integrated with individual market policies to satisfy the market reforms and, therefore, will 
violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties 
such as excise taxes under section 4980D of the Code. 
 
 
                                                             
12 See 29 CFR 2510.3-1(j).   
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