Individual Health Insurance Premiums FAQ

IRS Notice 2013-54: Compliance for HRAs and FSAs

In September 2013, the IRS issued Notice 2013-54 to clarify how the Affordable Care Act (ACA) applies to certain employer-funded health arrangements. This notice established that most "stand-alone" reimbursement plans fail to meet ACA market reforms, such as the prohibition on annual dollar limits and the requirement for zero-cost preventive services.

The Concept of Integration

The IRS and Treasury Department determined that an HRA (Health Reimbursement Arrangement) can only comply with the ACA if it is "integrated" with a compliant group health plan.

• Integrated Plans: If the HRA is part of a larger group health plan that already follows ACA rules, the HRA is considered compliant.

• Non-Integrated Plans: If an HRA stands alone, it is generally considered a violation of market reforms and may subject the employer to significant excise taxes (up to $100 per day, per employee).

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Key Rules from Notice 2013-54

1. No Individual Market Integration: An HRA cannot be "integrated" with a policy purchased on the individual market (such as through the Exchange). Because individual policies cannot be used to satisfy group market reforms, a stand-alone HRA used for individual coverage will fail compliance.

2. Premium Reimbursement Restrictions: Traditional HRAs are prohibited from reimbursing individual insurance premiums.

3. Cafeteria Plan Limits: A Section 125 Cafeteria Plan cannot be used to reimburse individual health insurance premiums on a pre-tax basis.

4. Employer Payment Plans: Any arrangement where an employer uses pre-tax funds to pay for or reimburse individual coverage is subject to HRA rules and, in most cases, is prohibited under this Notice.

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Modern Alternatives (Post-2013 Updates)

Since Notice 2013-54 was issued, Congress and the IRS have introduced specific exceptions that allow employers to reimburse individual premiums under very strict frameworks:

• QSEHRA (Qualified Small Employer HRA): Created in 2017 for businesses with fewer than 50 full-time employees. It allows for tax-free reimbursement of individual premiums up to an annual IRS limit.

• ICHRA (Individual Coverage HRA): Created in 2020 for employers of any size. This allows employers to offer a monthly allowance for employees to buy their own individual health insurance, provided the plan meets specific legal requirements.

Employer Tip: Unless you are specifically utilizing a QSEHRA or ICHRA, you should not reimburse employees for individual health insurance premiums. Doing so without a formal, compliant HRA structure can result in severe IRS penalties.