Paying for Individual Health Insurance Through Tax-Sheltered Cafeteria Plans

Wake Forest University Medical School, Division of Public Health Sciences, Winston-Salem, NC 27157-1063, USA.
Inquiry: a journal of medical care organization, provision and financing (Impact Factor: 0.55). 09/2010; 47(3):252-61. DOI: 10.2307/23035574
Source: PubMed


When employees without group health insurance buy individual coverage, they do so using after-tax income--costing them from 20% to 50% more than others pay for equivalent coverage. Prior to the passage of the Patient Protection and Affordable Care Act (PPACA), several states promoted a potential solution that would allow employees to buy individual insurance through tax-sheltered payroll deduction. This technical but creative approach would allow insurers to combine what is known as "list-billing" with a Section 125 "cafeteria plan." However, these state-level reform attempts have failed to gain significant traction because state small-group reform laws and federal restrictions on medical underwriting cloud the legality of tax-sheltered list-billing. Several authorities have taken the position that insurance paid for through a cafeteria plan must meet the nondiscrimination requirements of the Health Insurance Portability and Accountability Act with respect to eligibility, premiums, and benefits. The recently enacted Patient Protection and Affordable Care Act addresses some of the legal uncertainty in this area, but much remains. For health reform to have its greatest effect, federal regulators must clarify whether individual health insurance can be purchased on a pre-tax basis through a cafeteria plan.

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    • "State law controls whether list-billing violates small-group market reforms, but federal law controls whether list-billed insurance qualifies for federal tax exclusion (Hall and Monahan 2010). Because of a peculiar quirk in federal law (owing to how HIPAA, ERISA, and the tax code all interrelate), there is a strong, but unsettled, argument that section 125 plans may not be used for health insurance that is medically underwritten (Hall and Monahan 2010). Massachusetts avoided this problem by reforming its individual market, applying the same guarantee issue and community-rating rules to it as it does to small group insurance. "
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    ABSTRACT: To assess the impact of state laws requiring or encouraging employers to establish "section 125" cafeteria plans that shelter employees' premium contributions from tax. Available descriptive statistics, 65 key-informant interviews, and relevant documents in study states and nationally, 2008-2009. Case studies were conducted in Indiana, Massachusetts, and Missouri--three states adopting laws in 2007. Descriptive quantitative information came from insurers, regulators, and surveys of employers. In each state, 15-17 semistructured but open-ended interviews were conducted with insurance agents, insurers, government officials, and third-party administration firms, and 29 informed sources were interviewed from a national perspective or other states. Key informants were selected based on their known or reported experience, in a "snowball" fashion until saturation was reached. Interview notes were coded for systematic analysis. Finally, relevant rulings, brochures, instructions, marketing materials, and other documents were collected and analyzed. Despite the potential for substantial cost savings, use of section 125 plans to purchase individual insurance remained low in these states after 1 or 2 years. Absent a mandate, few employers were strongly motivated to offer these plans in order to retain an adequate workforce, and uncertainty about federal legality deterred doing so. For smaller employers, benefits to owners did not outweigh administrative complexities. Nevertheless, few downsides were found to states mandating or encouraging these plans. In particular, there is little evidence that many employers dropped group coverage as a result. Section 125 plans remain a limited tool for states to reduce the inequitable tax treatment of individually purchased insurance, but a complete remedy requires reform of federal tax law.
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    Virginia Law Review 07/2010; 97(1). DOI:10.2307/41060385 · 2.48 Impact Factor
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