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Posted: August 05, 2011

Caution: Employer liability ahead

HRAs have many pitfalls

James J. Scholl

Employers need to be very cautious when they cancel employer sponsored group medical insurance plans and assist employees with the purchase of individual insurance coverage.

There are several organizations in Colorado marketing this concept as a "defined contribution" plan and setting up an employer sponsored HRA (Health Reimbursement Arrangement) to provide tax free funds to reimburse employees for medical premiums. There are many liabilities employers will be exposed to under this arrangement.

An article in USA Today on describes the advantages employers are receiving from this defined contribution concept they call a "private exchange." The Bloom Health Model serves about 25,000 people, primarily in Minnesota, by helping employers and their workers to purchase their own medical insurance policies directly with the insurance company, and replacing the employer sponsored group plan. But Bloom CEO Abir Sen states in the article  that his company offers its services only in states where rejected applicants can qualify for special state-run, high risk insurance programs." Colorado is one of those states where rejected applicants may not qualify for the special, state-run, high-risk insurance program!

In Colorado, approximately 30 percent of the applications for individual medical insurance are declined coverage. However, under certain conditions, Colorado law provides that individuals who are declined for individual health insurance may apply to CoverColorado, the state high risk pool.

One of many problems with this "defined contribution" model is someone who is denied individual coverage, may also be denied coverage through CoverColorado. Colorado Revised Statutes 10-8-513 (2) (f) states that; "individuals shall not be eligible for coverage under the program (CoverColorado) if any public or private person (such as an employer) is "financially benefiting" from paying the premium for coverage of an individual in CoverColorado."

A determination of such benefit in the case of an employer is whether the employer terminated a group health insurance plan within the past 12 months of an individual's application and, among other things, replaced it with an HRA. If an employer terminated a group plan within twelve months, the application for individual coverage will be declined, unless the individual seeking coverage can meet all of the requirements of a federally eligible applicant (such as HIPAA eligibility).

Suzanne Bragg-Gamble, Executive Director of CoverColorado confirms by stating; "Yes, CoverColorado would deny enrollment in the case of an employer terminating a group health plan in the last twelve months - regardless of whether the employer establishes an HRA or adjusts wages to help employees buy coverage - because the employer is deemed to "benefit" from that transaction (i.e., the HRA or the wage adjustment will cost the employer less than the group plan, so the employer benefits from that)."

As a business owner, what do you think would happen in this situation? You just received a 15 percent rate increase for the third consecutive year for your group medical plan. You are approached by an insurance broker who shows you how your company can reduce its medical expense cost by 20 percent if you cancel your group insurance, have employees go buy their own medical insurance policy and set up an employer sponsored HRA to reimburse employees.

The Broker helps you set up the plan and assist your employees obtain their own coverage. But, one of your key employees has an overactive thyroid and takes medication and his spouse has breast cancer. Both are declined individual coverage. So the broker says, "not to worry, you can get coverage through CoverColorado" and helps the employee and spouse complete the CoverColorado application, but both are also denied coverage through CoverColorado.

So now you have an unhealthy key employee and very sick spouse with no medical insurance. Who do you think gets to pay their medical bills?

An HRA (Health Reimbursement Arrangement) is an employer sponsored plan under Internal Revenue Code Sections 105, 106, 213, and 3401. Contributing to or reimbursing employees for individual policies through an HRA may cause the individual policy to be viewed as part of a group health plan subject to the requirements found in ERISA, COBRA, HIPAA and other federal mandates.

An HRA is also subject to the nondiscrimination testing under section 105(h) and The Patient Protection and Affordable Care Act ("PPACA"). Plus, individuals could also be denied coverage if the insurance company determines the employer is paying, in whole or in part, the premium, or due to the recent passage of Colorado Senate Bill 11-19. This new bill allows employers in Colorado to utilize HRAs to fund individual health insurance plans for their employees, unless the employer had a small group insured health plan in effect during any portion of the prior 12 months.

In other words, you can't discriminate benefits between your employees; you must treat them all equally and appropriately communicate their benefits within the federal guidelines. Plus individuals can be denied coverage when an employer pays the premium. Unfortunately you have already canceled your group plan, and now you have employees without medical insurance even though many of the other employees have obtained medical coverage, and you did all this as the sponsor of the HRA arrangement.

OUCH...that hurts, you just became the smallest insurance company in Colorado!

Not only could you, the employer, have to pay all the medical expenses of this employee and his spouse, but you will also be exposed to paying for medical expenses for all employees for items that are covered under a group plan but are not covered under the new individual policies.
You may be able to recover some of your loss from the Broker who got you into this mess, but don't count on it. And what about the company who administers your HRA plan? Many of those vendors willing to administer the HRA program will inevitably not protect the employer from the liabilities outlined above.

Despite the purported benefits of this approach, the fact is, employers need to be extremely cautious about establishing such plans. Until additional guidance from the various federal agencies charged with enforcing HIPAA, ERISA, COBRA and state laws are changed governing employer sponsored plans including CoverColorado, I would recommend this concept be avoided. A professional insurance Producer can properly advise you and can be found through membership in the Colorado State Association of Health Underwriters.
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James J. Scholl, CLU, CHFC, owns Scholl Associates/BOSSupport in Lone Tree, CO. Jamie is past National Legislative Chair for NAHU and served as Senate appointee on the CoverColorado Long Term Funding Task Force. His firm specializes in employee benefits. He can be reached at 303-770-5050 and jamie@schollassociates.com.

James J. Scholl, CLU, CHFC, is a member of the Colorado State Association of Health Underwriters and owns Scholl Associates/BOSSupport in Greenwood Village. He can be reached at 303-770-5050 or jamie@schollassociates.com.

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