“Dumping” employees on exchanges? You may want to think again

Warn commercial clients—sending employees to the public health exchange is not only unethical, it’s now barred.

Insurance News


Employers who thought they could slash their health insurance bills by sending their employees to the state or federal health exchange should think again. A recent ruling from the IRS concluded this week that such plans not only violate the spirit of the law, they break the law entirely and are subject to a hefty fine.

That’s good news for health insurance agents and brokers, who have long been warning clients against employer payment plans—a strategy also known as “dumping.” Under this scheme, employers direct workers to spend their own money on insurance premiums and other costs, after which employers reimburse them for the cost.

Confusion in the new health law led some corporate lawyers and human resources professionals to believe “dumping” would satisfy new requirements under the law. The bottom line for producers meant one fewer commercial benefits client in their book of business.

This month, however, the IRS cleared up confusion in a Q&A section of its website. The question read: “What are the consequences to the employer if the employer does not establish a health insurance plan for its own employees, but reimburses those employees for premiums they pay for health insurance (either through a qualified health plan in the marketplace or outside the marketplace)?”

The IRS responded: “Such arrangements cannot be integrated with individual policies to satisfy the market reforms. Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.”

Of course, nothing can stop employers from "dumping" workers altogether. Christopher Condeluci, a Venable lawyer specializing in benefits and taxes, told Kaiser Health News the ruling is not strictly law. Employers who choose to give employees raises to compensate for losing health plans, or who choose to reimburse their workers, will simply be subject to fines of $2,000 or $3,000 per worker starting in 2016.

Nevertheless, the ruling has helped Robert Perry, an insurance agency owner in Draper, Utah, bring home the unethical and criminal nature of “dumping” to clients who were considering that route.

“They ask the question, but we’re always very careful to inform them that ‘dumping’ is illegal and it will cost them a pile of dough if they do do it,” Perry told Insurance Business. “Even when employees sign a waiver saying they have other coverage, we generally try to get as much information on the employee as possible just like any good broker.”

Perry says businesses are especially prone to dump their sicker employees onto the federal exchange, a practice he finds unprincipled.

“It’s pretty clear what the intent of the law is, but the IRS ruling has made it clear: large employers who are leaning this way shouldn’t do it,” he said.

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