Agencies Confirm that Certain Student Health Insurance Subsidies for Student Employees May Violate the Affordable Care Act

Franczek P.C.

Colleges and universities often offer to subsidize the cost of health coverage for student employees, either through the purchase of an individual health insurance policy or through a “premium reduction arrangement” designed to reduce the cost of student health insurance coverage.  Recent guidance from the IRS, the Department of Labor, and the Department of Health and Human Services (the “Departments”) clarified that, in some circumstances, these arrangements are considered “employer payment plans” and therefore do not comply with certain provisions of the Affordable Care Act (“ACA”).  Under IRS Notice 2016-17, institutions that offer these arrangements to students (usually graduate students) for any plan year beginning on or after January 1, 2017 will be subject to penalties under the ACA.

For many years, the IRS permitted employers to reimburse employees for the cost of an individual health insurance policy on a tax-favored basis.  Under the Affordable Care Act, the IRS issued Notice 2013-54, which curtailed the use of these so-called employer payment plans.  Specifically, the IRS said that employer payment plans cannot meet the ACA’s market reform requirements because the reimbursement itself (not the underlying health coverage) inherently includes an impermissible annual dollar limit on the amount of the employer’s payment towards health coverage.  That guidance also said that employer payment plans cannot overcome this defect by integrating with an individual insurance policy.  The upshot of Notice 2013-54 was that employers are now subject to steep penalties for reimbursing employees for the cost of an individual insurance policy purchased on the private market or through an ACA marketplace.

Since Notice 2013-54 was issued, some colleges and universities have continued to maintain premium reduction arrangements for student employees receiving student health insurance, which, under Notice 2013-54, may constitute an employer payment plan.  In situations where the institution offers health insurance to student employees through a written agreement between the institution and a health insurance issuer, that coverage may be considered individual market coverage, similar to a health insurance policy that an individual can purchase through a marketplace.  So, when a college or university subsidizes the cost of a student employee’s contribution toward the cost of such a policy – either through a credit, offset, reimbursement, stipend or similar program – the arrangement could be considered an employer payment plan that violates the ACA. 

In Notice 2016-17, the IRS recognizes that some higher education institutions may not have realized that that these arrangements were no longer permitted.  The Departments are accordingly giving colleges and universities until the end of 2016 to review their health care reimbursement policies to ensure that those arrangements are consistent with the Affordable Care Act’s limitations on employer payment plans.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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